6.5% is not a ‘fanciful’ number: CEA
5 min read . Updated: 01 Feb 2023, 12:14 AM IST
PremiumCommodity prices would play a key role in determining whether India meets its growth and inflation targets, CEA V. Anantha Nageswaran said in an interview, adding that India could well beat the projections made by global rating agencies if commodity prices fall
NEW DELHI : Commodity prices would play a key role in determining whether India meets its growth and inflation targets, chief economic advisor V. Anantha Nageswaran said in an interview, adding that India could well beat the projections made by global rating agencies if commodity prices fall.
Global policymakers are unlikely to end monetary tightening quickly as was expected by financial markets, as inflation could be stickier, he said, adding that this would also impact India.
He said capex investments from the government and the private sector would have to continue in tandem for India since its investment needs for the next 30 years were substantial. Edited excerpts:
Are global concerns of growth slowdown and, a looming recession, inflation real for India as we go into the next fiscal? Do you expect the monetary policy tightening cycle to continue?
For India, I don’t comment because I leave it to the Reserve Bank of India (RBI) to make these decisions. As far as global monetary tightening is concerned, inflation will prove to be stickier than what the financial markets expect. Financial markets are somehow expecting, at the moment, if you look at the market pricing, a fairly quick and swift end to the monetary tightening and even a resumption of the easier policy cycle. I really don’t think that is what policymakers have in mind, and we will get a glimpse of what they are thinking probably this week when the Federal Reserve has its monetary policy meeting. As far as the risk factors to India are concerned, both with respect to growth and inflation, they do come predominantly from global factors, and I would say commodity prices are going to be the key factor in helping us or hindering us from achieving our growth and inflation targets for 2023-24.
Global agencies, including the International Monetary Fund, have lowered their expectations of India’s growth . Are they justified, given the bounce back of domestic consumption seen in FY23?
Most of them are basically lowering their growth forecasts for many countries except in the case of China, where IMF today, in their World Economic Outlook update, have bumped up the forecast because of swifter than expected reopening. In India’s case, there was no change to its growth forecast. By the way, they had 6.1% before in October, and they stuck to that, and they have 6.8% for 2024-25, and they stuck to that as well. The slowdown that they are projecting is primarily on account of monetary tightening in many parts of the world, including in India, and they expect monetary policies lagged effect to play out in 2023-24. Now, whether that would necessarily happen is not just a function of lagged effects but also how commodity prices behave. If commodity prices drop meaningfully, then positive real rates of interest will not necessarily be a dampener on growth, and we will end up achieving a higher growth rate than what these people project. It is not just private consumption. Even capital formation has picked up quite well in the first half of the fiscal, and also high-frequency indicators should not cause much of a slackening of the momentum in the economy, and that is why we feel our baseline number of 6.5% is not something that is fanciful, even though we acknowledge the risk factors by saying that downside risk is higher than the upside risk to our baseline number.
How can the government ensure inflation does not get out of hand, given that commodity, food, oil and fertilizer prices are continuing to rise?
Commodity prices and industrial metal prices did come down meaningfully in the second half of last year, which is why the Wholesale Price Index inflation came down from 16% plus down to 4.5-5% in December. We had a particularly challenging year, and we overcame them through a combination of price measures and supply measures and monetary policy measures. Of course, we will have to deal with them; there is no point in being hypothetical about it.
On fiscal deficit, will it be realistic to expect the Centre to achieve the target of 4.5% of GDP by FY26? Some agencies (Fitch) have said it would be tough.
On fiscal deficit, I think we will; we will know more about it tomorrow.
You’re anticipating the widening of the current account deficit (CAD), yet you’re expecting tailwinds from oil prices staying low. Why the contrarian viewpoint?
We don’t expect a widening of CAD. If anything, we don’t make a forecast and the general CAD, according to RBI, is going to be lower than what it was, what it is going to be in 2022-23. So this year, it might be in the region of 3% because our nominal GDP base is going to be slightly higher than originally anticipated. So CAD might be somewhere in the vicinity of 3% of GDP, and next year I think most of the forecasts are somewhere between 2.2% and 2.4% of GDP. So we don’t expect a widening of CAD per se, but naturally. We understand it is subject to uncertainties because we still do not know how geopolitical conflicts and the global economic situation will result in higher or lower oil prices.
What are the avenues available with the government to manage CAD if it widens?
There are multiple ways to manage demand, ultimately it is the higher demand that flows through into imports, and we have the reserves to manage CAD, and it’s always as sustainable as it is possible to finance, and if the global conditions are relatively propitious and investment flows happen, then a CAD can be financed, and that is what we found in the course of 2022-23 as well. It was initially considered a formidable challenge, but it is being financed through direct FDI flows, bilateral credit, and also through portfolio flows to some extent. So there is no single mechanism to finance a CAD. It is a combination of measures that would be brought into play.
The survey points out that private sector capex has started picking up. Will that take pressure off the government to spend on capex in the current year? Or will the government have to continue with high capex spending?
It is a matter of the economic cycle and the context. India would need more public investment and private investment to continue to grow in tandem. Our investment needs for the next five to 10 or even 30 years are quite substantial and, therefore, there is no question of doing an either-or thing here. But how much and who does what, and what proportion is not something that we can give a mechanical answer to.
