Inflation: Need to focus on both supply and demand for growth without inflation: KV Subramanian, CEA – The Economic Times

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Chief economic advisor KV Subramanian says there were signs of a pickup in economic activity and the recovery should gather pace by the third week of June, helped by the decline in Covid cases and faster vaccination. He estimates 700 million people will be inoculated by September.

The country needs to learn from mistakes and emphasise both supply and demand to generate growth without inflation, chief economic advisor KV Subramanian said. He was responding to widespread calls for emergency fiscal measures to support demand and even print money if needed.

There were signs of a pickup in economic activity and the recovery should gather pace by the third week of June, helped by the decline in Covid cases and faster vaccination, Subramanian told ET in an interview. He estimates 700 million people will be inoculated by September.

Indicating that the window for further support measures remains open, the government will assess, evaluate and come up with additional measures when necessary, as it did last year, he said.

He ruled out any risk of a repeat of the taper tantrum of 2013 when the unwinding of quantitative easing starts in the US, reasoning that India’s economic fundamentals are strong.

Subramanian pointed to the worldwide response to the global financial crisis that had been focussed on the demand side and therefore led to runaway inflation.

“That’s why supply side aspects are very important… A response that is both demand and supply driven is one that delivers growth without inflation,” he said, adding that the budget had done just that.

He said just focusing on demand and revenue expenditure was responsible for the spike in inflation and the widening of the current account deficit and fiscal deficit that led to the macroeconomic imbalance during the 2013 taper tantrum. “I think we need to learn lessons,” he said.

On Recovery
Subramanian said economic activity should start picking up between mid-June and July as the pandemic abates and restrictions are lifted by states.

“The saving grace is that over the last 10 days, as the second wave cases have started declining, these indicators (e-waybills and power consumption) have picked up significantly,” he said. “If you take that into account, I can fairly assess that quite likely by the third week of June and July, things should be coming back significantly.”

Impact of 2nd Wave
He cited interactions with experts, who expect the second wave of the pandemic to subside by mid-June.

Subramanian maintained that the impact of the second wave was not likely to be substantial, but didn’t provide any estimates. The Economic Survey 2021 authored by him had forecast 11% growth in FY22. Most independent experts had forecast a higher recovery from the 7.3% contraction in FY21 but have since pared their estimates to high single-digit growth in FY22. The Reserve Bank of India cut its FY22 growth estimate to 9.5% from 10.5% earlier at its monetary policy announcement on Friday. “RBI projections were consistent with the government’s own sense as well that the impact will not be very large,” CEA said.

Two key aspects will impact growth — how fast the country can vaccinate and the possibility of a third Covid wave, he said.

“For instance, if we are able to vaccinate a good number of people by September and, given the current supplies, our own estimation is that around 70 crore people can be vaccinated by September, then a lot of the risks of a potential third wave will go down,” he said.

On Rising Stock Markets
Asked about the records being set on the bourses amid the pandemic, he said it wouldn’t be fair to say this was entirely a bubble. “If, for instance, the high price levels were combined with high volatility as well, then I would certainly be worried about a large bubble,” he said. “There may be some inflation because of the liquidity that is there but I think it’s not really that concerning,” he said, adding that the VIX volatility index and bond yields remain stable. “If you look at the corporate AAA spreads over the G-Secs, those have also not widened,” he said. “In other words, risks in the system, which the bond market captures well, have not gotten exacerbated.”

However, he said there was no denying that there was surplus liquidity because of easy monetary policies across the world.

Taper Tantrum Risk
“I don’t see the risks there because we have tried to ensure that the macro fundamentals are quite sound,” he said. “The external sector looks to be pretty solid as well.”

Several reform measures have been put in place in contrast with the situation at the time of the global financial crisis, when no policy changes were made. The impact of the reforms will start coming through as well, he said.

“When you put that together, you actually start seeing that we will be in a much better position when the tapering happens,” he said.

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