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NEW DELHI : India’s economy is clearly on a sustainable recovery path but though growth drivers give confidence, recovery in certain sectors may come with a lag, said Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister (EAC-PM). In an interview to Mint, Debroy spoke about the investment revival, vulnerable spots in the economy, impact of global events, and the clean-up in the system that brings efficiency in medium term but may entail a short-term price. Edited excerpts:

Is the economic recovery that we see now sustainable?

Commentators have focused a lot on what is happening on real growth in FY22. It is fairly obvious that real gross domestic product (GDP) growth in FY22 is going to be somewhere around 10%, perhaps a percentage point more or less, that is a band of 9-11%.

The economy is recovering, but are we prepared for a possible third wave of the covid-19 pandemic?

All talk about a third wave of the pandemic, I think, misses the point a little bit because the third wave will not be uniform across the country. We can see that right now. Given the vaccination, it is fairly obvious that the third wave may result in infections but will not result in the kind of deaths that we witnessed during the second wave. The medical systems are better and, therefore, there is no question of a union-level lockdown of the kind we have witnessed. Therefore, the health outcome apart, I do not think there may be any likely impact of a so-called third wave on the growth rate.

What is your forecast for FY23?

The newly constituted EAC-PM has not had its first meeting yet. Until the first meeting, I don’t know what the view of the EAC is on growth prospects in FY23. What I am saying is my view. I think the real GDP growth rate in FY23 can be anywhere between 6-7%. It will be difficult to be more precise. The base effect will be gone. There are two questions to be asked. One, much of what the government has done in the nature of reforms has been what broadly economists would call supply-side measures. Supply-side reforms will take some time to have their impact. In the infrastructure sector, studies show 18 months to two years. The government has done a lot in the infrastructure sector. The first question to be asked is whether this timeline is over. This coincides with the covid timeline. Is that timeline over or are we still counting it? A lot of what this government has done since May 2014 is a cleaning up, whether it is bringing the Real Estate (Regulation and Development) Act or rolling out the goods and services tax (GST). That clean-up brings efficiency in the medium term but in the short term it can have an impact. You will able to tolerate the adverse impact on growth because of the efficiency gains it brings. The second question to be asked is whether that cleaning up is over or whether we are in the midst of that cleaning up. To both these questions, if I think the supply-side time lag is over and the clean-up is over, I will probably say the real GDP growth is 7% in 2022-23. If I think it will take a little bit longer, then I will probably say 6%.

What gives you confidence about the economic growth recovery?

If I look at the four broad drivers of growth, net exports are doing pretty well now. Subject to the fiscal constraints that the Union government has, government expenditure has also been reasonably alright. Consumption, depending on what kind of consumption you are talking about, is showing signs of recovery. The only question mark today is really investments. There are sectoral elements to this. In some sectors, investments are happening and in sectors where there is excess capacity, investments will happen with a slight time lag. I would say the recovery is very broad-based. Obviously, there are sectors affected by human-to-human contact such as travel.

What are the vulnerable points?

There are two or three issues that I think I should mention, though not in a negative sense. One is how MSMEs are faring. MSMEs do not always mean MSMEs that are incorporated—most of them are unincorporated. There are also MSMEs that do not borrow from the formalised credit market. MSMEs have also been subjected to a little bit of exogenous shock because of GST. The other issue is how the urban labour market is faring. These are the two broad questions. I do not have a satisfactory answer. However, since growth is going to happen, which I am confident of, I am reasonably certain that the labour market will also recover with a time lag. For me, the key indicator would be construction, which is partly, not entirely, linked to real estate.

gireesh.p@livemint.com

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