India’s Chief Economic Adviser (CEA) V Anantha Nageswaran is optimistic about the country’s growth forecast despite higher than expected inflation numbers and looming macro concerns.
Speaking exclusively to Moneycontrol on May 17, Nageswaran said India’s growth forecast range is “reasonable” despite monetary tightening.
“The question of whether monetary tightening will set back the recovery or not will have to be evaluated empirically based on the evolution of the economy. Right now, the range of growth forecasts between the Reserve Bank of India (RBI) and the International Monetary Fund (IMF) is between 7.2 percent and 8.2 percent for 2022-23. That range is appropriate and reasonable,” he said.
Here’s a look at what Nageswaran had to say on inflation and what India can expect:
Inflation
The CEA said global price shocks posed “upward risks to domestic inflation”, which over time and with increase in interest rates in advanced economies would dampen demand and put downward pressure on energy prices.
since aggregate demand in India is “only recovering gradually”, the risk of sustained high inflation— similar to what was experienced in 2009-2014 “is somewhat low”, he said.
Nageswaran was emphatic that inflation hurts the poor, especially the rural poor and low-income groups — where the rise in prices of food and fuel items carry a higher weight in the consumption basket.
RBI rate hike
The CEA said higher interest rates would raise the cost of inventory holding by middlemen and traders and discourage hoarding.
In that context, the RBI monetary policy committee’s (RBI MPC) decision “does have a role to play even if global supply-side factors are behind the rise in inflation via the rise in the prices of food and fuel”.
He also said a part of the rise in food inflation is on account of an unfavourable base effect, adding that food inflation is expected to “moderate” as this fades away.
“Additionally, record food grains production, adequate buffer stock levels and the government's supply-side interventions will keep food inflation under check on the assumption of a normal monsoon,” he said.
Nageswaran also recalled intervention by central banks around the world, saying raising interest rates “can have a silver lining”. He added that if this succeeds, it will “lower aggregate demand and reduce demand for crude oil and other commodities, thus dampening their soaring prices and help contain global inflationary pressures”.
This is “already happening”, he said as he cited falling prices of several industrial commodities.
“Even crude oil has been trading in a range of $100-110 per barrel after hitting a peak of around $130. If interest rate increases in advanced nations further dampen demand, the recent decline in their prices will continue, thus lowering the inflation rate globally in the coming months and in the second half of the financial year in India,” he said.
MPC and impact on employment
The CEA said the impact of the RBI’s monetary policy decisions on employment should be evaluated in context.
Noting that demand for contact services such as hospitality, travel and tourism is seeing a revival as COVID-19 lets up. These sectors will add jobs.
Nageswaran referred to India's Services Purchasing Managers' April index, which found business activity in services sector is “supporting renewed increase in employment”.
He also pointed to April 2022 GST collections as “reflection of the economic recovery and that momentum should continue in the coming months”.
“The manufacturing sector witnessed a mild increase in employment in April. However, in the manufacturing sector, growth was brisker in the intermediate and capital goods sectors. It augurs well for future employment generation,” he added.
“The RBI adopted an accommodative monetary policy by reducing the policy repo rates by 115 basis points (bps) during the pandemic. The recent raising of 40 bps is a partial reversal of the accommodative stance of RBI, and hence, the monetary policy is still accommodative,” he added.
Liquidity watch
Speaking on the short-term impact of higher interest rates on output and the inflation-growth dynamics, Nageswaran recalled RBI Governor Shaktikanta Das’ speech on May 4 when he said the central bank’s policy approach to withdrawal of liquidity would be “careful and calibrated”.
“The non-financial corporate sector now has healthy balance sheets and a healthy bottom line. Therefore, a calibrated rise in interest rates need not dampen their capital expenditure plans and the consequent employment generation,” he said.
The CEA said the incrementally higher cost of capital could be offset if the increase in interest rate moderates price pressures and input costs.
He was also optimistic that in case the rising cost of capital makes businesses re-work their investment plans by focussing more on existing capacity and higher operating efficiency that, too, “will be a positive as it would boost output, relieve supply-side price pressures and generate employment”.
RBI policy outlook
In a surprise announcement on May 4, Das said the central bank's MPC voted unanimously to raise the repo rate by 40 bps to 4.40 percent. The meeting was unscheduled as the MPC was to meet in June.
Das said the MPC judged the inflation outlook warranted an “appropriate stance” and stressed that the monetary policy "still remains accommodative".
"We in the RBI remain steadfast in our commitment to contain inflation and support growth. Inflation must be tamed in order to keep the Indian economy resolute on its course to sustainable and inclusive growth," Das had said.
Also Read | Experts say MPC's June 6-8 meet 'super live' for rate hike after April inflation shocker
However, experts are expecting a further rate hike. With higher-than-expected retail inflation print for April, they see the June 6-8 MPC meeting as "super live" for another repo rate hike.
Data released on May 12 by the statistics ministry showed Consumer Price Index (CPI) inflation soared to 7.79 percent in April–the highest since May 2014.
Not only was the April inflation number sharply higher than it was in March, it was also above economists' expectations of 7.5 percent.
With core inflation also surging to 7 percent from 6.4 percent in March, the talk of the repo rate being raised again on June 8 has gained momentum. Several economists also see the repo rate at 5.15 percent after the August MPC meet.
India's inflation based on the Wholesale Price Index (WPI) rose to 15.08 percent in April from 14.55 percent in March, according to data released by the commerce ministry on May 17.
The WPI inflation was 10.74 percent a year ago. Another 10 percent-plus print in April means WPI inflation has extended its stay in the double-digit territory to 13 months in a row.
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