BackEven if growth has bottomed out, there is no reason to cheer: Gita Gopinath
Gopinath comments on India's economic potential and on how curtailing inflation is important in the long run
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New Delhi: The next central government will have to push through economic reforms that have been talked about for years but have not been implemented, said Gita Gopinath, professor of economics at the Harvard University.
In an interview, Gopinath, who is in New Delhi to attend the Delhi Economics Conclave, comments on India’s economic potential and on how curtailing inflation is important in the long run. Edited excerpts:
Do you think that the Indian economy has bottomed out?
Even if growth has bottomed out, there is no reason to cheer because we are talking about below 5% growth. In the last few months, the finance ministry has been proactive about trying to regenerate growth and some of the policies have worked which is a good thing. But growth is still very low and there is no reason why India should not be growing at 8% given its stage of development.
What should be the agenda of the next government at the centre?
India needs to “just do it", by which I mean that it is quite clear what needs to be done and the problem has been with implementation. Economists have talked ad nauseum about the need for infrastructure investment, for land reforms, for improving the ease of doing business, curtailing the fiscal deficit, and so on. I think the agenda already exists. What we need is execution of that agenda. I hope that it happens in the New Year.
The Reserve Bank of India governor talked about how the existing government needs to push through reforms, raise diesel prices to market prices so that the next government finds it easier to manage the economy. Do you think it is realistic?
In a perfect world, yes, that would be the right thing to do. Unfortunately, governments do not have a philanthropic approach towards future governments. But it is clearly the right thing to do.
Does India face the risk of a rating downgrade if the new government does not push through reforms?
I suspect that if we have a government that does not seem completely fractured and there is government at the centre that is committed to improving the environment for growth then the new government will be given time to deliver.
Do you agree with the central bank’s approach that gives priority to inflation over growth?
There is evidence that high inflation is getting embedded in expectations. That is one of the big concerns of a monetary policymaker. If people expect high inflation and raise wages to reflect the high inflation, then it becomes self-fulfilling. Dr Rajan (RBI governor Raghuram Rajan) wants to break that cycle which is why he has to be really aggressive.
The reason we have high inflation and low growth is a lack of good supply-side policies. The issue of capacity constraints and infrastructure bottlenecks have not been adequately addressed.
What do you think will be the impact of tapering by the US Federal Reserve?
The market’s already responded in anticipation of the tapering so it is possible that the actual act of tapering will be less disruptive. Also with the current account deficit at 1.2% of GDP (gross domestic product) and the ongoing fiscal consolidation, the Indian economy is in a better situation to weather external shocks than this past summer. India should also continue its macro-prudential policies.
Do you expect the rupee to be volatile?
With the elections around the corner and uncertainty on what the final government will look like, there is certainly room for rupee volatility.
But what is true is that a lot of the market reaction has already been priced in. The fact that there was an expectation of monetary easing had an impact on the currency.
A lot of the drop in the value of the rupee has actually happened. When the actual policy change happens, there could be less of a reaction.
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