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Interview | Inflation should remain range-bound till December, says chief economic advisor

Strap: Chief economic advisor Krishnamurthy Subramanian said the Centre is confident of completing the privatisation of Air India and Bharat Petroleum and the Life Insurance Corporation initial public offering by the fourth quarter

September 28, 2021 / 07:14 PM IST

India is set to achieve double-digit growth in this financial year, chief economic advisor Krishnamurthy Subramanian told Moneycontrol in an exclusive interview. Speaking on a range of topics, Subramanian said there is a possible upside to his GDP growth forecast for FY22 and tax revenue targets.

The CEA, who says he has started work on the next Economic Survey, added that the economic impact of a third wave may not be as severe as previous instances because of the vaccination drive and the administrative experience gained from dealing with containment zones. Edited excerpts:

What is your assessment of the state of the economy at the halfway mark of the year?

It is a very distinct possibility that we should have double-digit growth this year. Inflation has moderated for three consecutive months. Till December, we expect inflation to remain range bound. It is important to understand that this is not happenstance. India is the only country that has done supply-side measures. This is basic economics – that if you only do demand-side measures, then you will get inflation because price level goes up and monetary and fiscal policies cannot be in tandem.

At the same time, the Indian economy now has a lot of structural differences versus the pre-pandemic period… We have turned crisis into opportunity and carried out reforms by bringing a lot more competition, especially in the factor markets like labour, capital and financial sector.


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The signs look good, going forward. We still have to be watchful about the pandemic, not let our guard down. As long as we are following the protocols while indulging in all economic activities, this recovery can continue.

Are you sticking to your GDP growth forecast of 11 percent or do you see an upside to it, given the strong recovery?

The way the recovery has panned out in the second quarter, there’s a very good likelihood that we may actually be able to realise double-digit growth. So we continue to stick to our earlier estimates. There is a possibility of an upside. But at the same time, I don’t want to get too ahead because the third wave, albeit not very devastating and with restrictions that are better managed, is something that cannot be ruled out.

There is perhaps an assessment in the government that the economic impact of a third wave will not be as severe as the second wave or last year. Why is it so?

If you remember, in the June edition of the monthly economic report, we had mentioned that once you are infected – let’s say you have these antibodies – and research now shows that it lasts for six to eight months. What we had pointed out is that one dose plus the antibody is equivalent to protection of two doses. And that is why we had said that till the time India vaccinates almost its entire adult population in December… the protection provided by the seroprevalence should actually be there.

Second, we have learned to actually manage – despite the very devastating second wave – to be able to keep the emphasis on livelihoods even while taking care of lives. I don’t think there should be a need for even the kind of restrictions that were imposed in May and June if the third wave is not very devastating.

Are you confident that the target of vaccinating the entire adult population by December is achievable?

We had projected that India can vaccinate around 70 crore doses by September. And while at that time it had seemed ambitious, now we are close to 85 crore. So, at this rate and with supply having expanded significantly – so much so that we are actually now planning to start exporting vaccines again – we should be very much on track to be able to vaccinate the adult population by year-end.

As chief economic advisor, would you advise the government on cutting excise duties on petrol and diesel?

We think of excise duties from an inflation perspective. Now when it comes to retail inflation, the much bigger contributor, of nearly 50 percent, is food inflation. Overall, because of decline in food inflation, the overall consumer price index-based inflation is under control. It is well within the Monetary Policy Committee’s comfort range. So, the question on petrol and diesel excise duties is a moot question.

While tax revenues have shown strong growth and a large surplus has been transferred from the Reserve Bank of India, privatisation remains a concern. There are just six months left in the fiscal year and not much progress has taken place.

When you look at divestment for this year, there are three key items. One is Air India, second is Bharat Petroleum and third is the LIC initial public offering. For Air India, two bidders have come in and both of them are serious bidders. So I feel like things are getting aligned and that deal should happen soon.

The BPCL privatisation and LIC IPO… we are confident that it should happen in the fourth quarter because there’s a lot of work that has already happened. So, when you look at the divestment target, that Rs 1.75 lakh crore that we have budgeted, we should be able to meet that target. Do keep in mind that any proceeds that come from asset monetisation, for instance, have not been factored in. While that money will go to the PSUs, the government will get part of it through dividends.

Given the strong tax revenue proceeds so far, do you think that tax revenue targets for the year could be exceeded?

It is possible that on nominal growth, the deflator may actually be a little higher than what has been projected, especially because the wholesale price index contributes to it significantly. So, even with me being conservative and not changing my projections for real growth, nominal growth may actually be higher and tax buoyancy would also contribute. So both of those could actually lead to the tax revenues being higher than budgeted.

The Centre seems to be unrelenting in its bid to not extend GST compensation beyond June 2022. The states clearly want it. What is the way forward?

What you have to acknowledge is that when the GST structure was put in place, there was a 14 percent increase that was factored in. And that increase was factored in given the inflation environment that was there at that time… You have to keep in mind that the actual nominal growth has not been 14 percent at all. Compared to the counterfactual where, let’s say GST had not been there, the states’ revenue would have grown at a lower rate compared to the 14 percent that was committed and this is something that states have to keep in mind. This is something that has to be first and foremost acknowledged. States must recognise that they got higher growth rates on their indirect taxes than would have happened otherwise.

As for revenue-generating measures like correcting inverted duty structures, that is actually something that is good because even from an efficiency perspective, it really helps. It has been debated in the GST Council and there’s been overall quite a lot of agreement that this is something that needs to be worked on.
Arup Roychoudhury
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