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Chief economic adviser in the finance ministry Krishnamurthy Subramanian presented his third Economic Survey on Friday, three days ahead of the FY22 Union Budget, giving the clearest signal yet that the government may finally be shedding its fiscal conservatism and opting for an expansionary budget to support recovery after covid-19 ravaged Asia’s third-largest economy. In an interview with Mint, Subramanian talks about India’s “V-shaped" economic recovery and the government’s resolve to continue to support the vulnerable till the economy is back on the pre-covid path. Edited excerpts:

The Economic Survey spoke about a V-shaped recovery. Many, including the International Monetary Fund, has pointed out that this is merely mechanical or statistical in nature, and one should not be too enthused about it. Do you agree?

After the first quarter gross domestic product (GDP) number had come out, there was uncertainty about the recovery that would pan out. On 31 August, when we briefed the media that V-shaped recovery was happening, based on the high frequency indicators, there were several who had doubts about that.

A V-shaped recovery is when there is a fall and there is an increase, which is what indeed manifested. After a 23.9% decline, there has been a significant improvement to -7.5% in Q2, a marginal positive is expected in Q3, then a more positive number in Q4, and 11% in the next financial year. That is indicative of a V-shaped recovery.

Everybody predicted positive GDP growth in FY22. What is your take?

No, for FY22 there were people who actually said GDP will contract. However, I think the important point to note is that we have to be consistent across time.

In August, I do remember many people questioning when I actually said there is a V-shaped recovery going on. This indicates that people were not as sure as we were. Now that it has manifested, to say it is obvious, is, I think, time inconsistent.

The survey talks about having a counter-cyclical fiscal policy holding that debt sustainability is not a problem. Economists have been arguing this for at least last two years, but the finance ministry chose to take supply side measures such as cutting corporate tax. Is there a change of heart at the finance ministry?

No we have highlighted very clearly in the Survey that we are focused on both supply and demand. Within demand, it is important to distinguish between essential items and discretionary items.

The fiscal policy of the government this year has been quite calibrated and consistent with what the Survey recommends. The Survey makes it very clear that fiscal policy has to be counter-cyclical, but it also signals that the government has to keep in mind the multipliers that come with it, that the money has to be well spent. That is why the Survey is recommending, for instance, investment in infrastructure.

In the pre-pandemic years, when the economy was on a downslide and there was clamour for fiscal stimulus, the government chose to take more supply side measures. In that sense, is there a change of heart at the finance ministry now?

Formulae that work for normal times don’t work for extraordinary times.

Many believe the pandemic may have impacted India’s medium-term potential growth. Do you agree?

We have clearly said that India recognizes that the impact of the pandemic both on supply and demand and, therefore, it is the only country to have made so many structural reforms so that the supply side can be taken care of and the demand side we have already talked about. So we have taken steps on both fronts.

Many have also pointed out that India’s economic recovery won’t be equitable and those hardest hit are unlikely to regain their economic status anytime soon. Do you agree?

If you look at the response the government has come up with, this has been covered extensively in the first chapter in the Economic Survey, both in volume 1 and volume 2. There are a few aspects that must be highlighted.

One is that there has been a calibrated response looking at the pockets or the constituencies that need intervention. There an intervention has been provided. Initially, when the uncertainty was very high, people would not have done discretionary spending and there were economic restrictions, the emphasis was on essentials.

India implemented possibly the largest free food programme anywhere in the world to 800 million people. Direct benefit transfers were given to the vulnerable sections, emergency credit and liquidity measures were taken to support especially the smaller firms, forbearance was provided. All these were essential parts of the measures. Once the economy started unlocking, that’s when India implemented measures to aid discretionary spending.

Atmanirbhar Bharat 3 had a wage subsidy programme, 65,000 crore of all dues being paid, which makes the private sector cash-rich and leads to greater spending.

If you take these into account, India has actually taken care of the vulnerable, especially on the essential aspects, and the country has responded in a calibrated manner to all the constituencies that need intervention. The government will continue to do so till the recovery is complete and we are back to the pre-covid path.

The World Bank and the United Nations have said that the pandemic may lead to an increase in poverty in India. Do you agree?

As we have talked about in the chapter on inequality and growth, India must continue focusing on growth, because growth is what lifts people out of poverty. Since 1991, economic growth has accounted for 85% of the reduction in poverty. So the focus on increasing growth must continue. That is what will lead to reduction in poverty as well.

The Survey briefly discusses monetary policy targeting core inflation versus headline inflation. Does our inflation targeting framework require recalibration, giving more emphasis on growth?

The point that the Survey is making is that if you look at the recent phenomena of inflation, typically it starts with vegetable inflation, which gets incorporated into food inflation, which then gets incorporated into Consumer Price Index (CPI) inflation. The Survey also points out that the variants in the amount of food inflation, vegetables for instance, how frequently they change itself varies across different commodities. These are aspects that must be kept in mind when we are thinking about inflation because if you take potatoes, onions and tomatoes for instance, those are effectively essential items and the prices typically reflect changes in supply, not in demand. Therefore, the point the survey is making is that because monetary policy is primarily an instrument for regulating demand, this must be kept in mind.

Will you like core inflation to be a separate target in the monetary policy framework?

The point that the survey is making is that monetary policy cannot do too much about supply side factors, which lead to inflation.

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