In a few weeks from now, Arvind Virmani will be leaving his job as the chief economic adviser and taking over as executive director on the board of the International Monetary Fund. Ahead of his departure, he took time to speak to Mint on a range of issues, including the improving state of the economy and the growing threat of inflationary pressures. Edited excerpts:
What is your sense of the current state of the Indian economy?
It is good and it is as per the forecasts that I have been making. If you look from March basically, I had made a conditional forecast saying that if the the US economy and world economy, in particular, bottoms out and we don’t have any negative surprises, then we would see a U-shaped recovery in terms of quarters and the average growth would be similar to the previous year, which is around 7% adjusted for agricultural growth.
Growth outlook: Virmani says the economy should do 8%-plus next year and the year after it should be back on the high growth path, between 8.5% and 9%. Harikrishna Katragadda / Mint
Soon after that the global financial institutions came out with all kinds of even worse negative predictions and then the opposite happened, which is that more and more people thought that there will be a global recovery. In the Economic Survey we were confident and, in fact, we put out a forecast for the first time though we kept it slightly on a broader band because of the global uncertainty, which was 7%, plus-minus 0.75%. So the developments since then described the bad monsoon, which happened after that. One is reasonably confident of that forecast.
So now with current sense about the economy, the outlook for next fiscal will presumably be better?
Well, as far as next fiscal is concerned, you have to take it as my personal view as there will be a new chief economic adviser. As far as I am concerned, personally I can make a forecast for next two years, which is we should do 8%-plus next year and the year after we should be back on the high growth path between 8.5% and 9%.
Inflation is emerging as a macroeconomic concern. Will it be so severe that it will require a policy response like an interest rate hike?
WPI (Wholesale Price Index) inflation was expected to rise, perhaps it has risen a little faster than one would have anticipated six months ago. But one thing always remains: the trade-off between growth and inflation. But there is one negative factor that has disappeared, which is global stabilization of financial markets and one negative factor that has appeared is the monsoon and the supply-side issues. In some ways monetary policy can affect demand and can impact (inflationary) expectations. So clearly when there are supply-side issues, you can’t say it’s (a) demand problem. But the (inflationary) expectation issue remains. So those are the kind of decisions the central bank needs to take.
So it is the way inflation shapes up that would determine to a large degree the monetary policy stance
I don’t have any idea what RBI (Reserve Bank of India) would do. Even in this case of U-shaped recovery, this has been our stand even at the international fora that we need to make sure that this recovery is firmly in place. Just that I have been saying this does not mean RBI believes in it. They have to make their own decision about future growth. But I will go by my judgement.
Is it time to unravel the stimulus?
The time has already been indicated even in the interim budget. We have repeatedly said that this fiscal stimulus is for last year and next year, and we have to come back to FRBM (Fiscal Responsibility and Budget Management) targets.
What about the rest of the world? Is it the appropriate time for them to start unravelling?
That is an interesting question because there is a little bit of as-ymmetry. When you are coming out of the economic downturn, it becomes much more individual. Each country has to see the trade-off much more individually. So we have been saying that it is not an issue of simultaneity, it’s a question of coordination.
Is the spike in oil prices a key area of concern?
If the whole world starts recovering, you will get another energy shock. At some point it is going to be a problem again. But that depends on the external oil dynamics.
Will exports continue to be in the doldrums?
Exports will be a source of weakness. That is where policy (response) comes in... The global environment is not going to be that favourable. You have to make sure that your internal stock keeps improving and make sure that the oil shock does not throw you (off) again.
Are we running the risk of creating an asset bubble?
The mistake people (analysts) made last year, they are making the reverse mistake this year.
Even though organized sector and export sector fell, the overall economy will not be as affected. Remember that argument, it is exactly the reverse now. It is the organized sector that is recovering and with it the stock market because that is what it is connected to, the rest of the economy is not to recover that fast because it did not fall that fast. So the important point here is not to mix up the two. The organized sector is still a small part of the economy and we are talking about the overall GDP (gross domestic product). It will not suddenly shoot up overnight.
You said exports will remain in the red for quite some time. Do you mean to say, then, that the stimulus provided to the export sector should continue next year?
The stimulus I have talked about in this context is the fiscal deficit. That is basically a way of providing adjustment assistance because you had this big shock. That shock is over and you are on recovery path. Then where is the question of adjustment assistance. The specific policy measures taken were time bound, it was for this year and it should finish. Whether it will or not I don’t know, there would be other people who would be advising on the issue.
The other issue is the dual listing. One of the largest mergers by an Indian company was set off due to the problem with dual listing. We believe you have some thoughts on it.
This is an issue worth reflecting on and the reason for saying it is the process that has been adopted has been gradual liberalization of the capital account. Given that it became an issue in a particular case means that it could arise again next year or the year after. So all those institutions who are concerned on this issue, which are department of economic affairs in the finance ministry, RBI and Sebi (Securities and Exchange Board of India), etc., should reflect on this issue and come up with a policy. It’s like the oil price issue. When you had an oil price shock, once it is gone away, you should not forget about it and wait for the next time to be hit by it. You have time and think about it and come out with a policy approach because you could not decide at the last moment when it happens.