In last month’s meeting of the monetary policy committee (MPC), Ashima Goyal was one of the two members who voted against the resolution on remaining focused on the withdrawal of accommodation.
In last month’s meeting of the monetary policy committee (MPC), Ashima Goyal was one of the two members who voted against the resolution on remaining focused on the withdrawal of accommodation. The other member was Jayant Verma. Goyal tells Joydeep Ghosh that keeping the real rate of interest at 1% will help anchor inflation expectations and prevent overheating without hurting the growth recovery. Excerpts:
You have been talking about how real rate of interest shouldn’t exceed 1% as it would hurt growth. Growth is expected to decelerate in the remaining period of this year as well as the next year. Is it a fit case for a pause in repo rate hikes?
Further policy action will be data dependent. Inflation is now within the tolerance band, but the MPC looks through temporary supply shocks. So, we have to see if the softening sustains. At the current stage of the economic cycle, a 1% real rate of interest would help anchor inflation expectations since policy rates rise in line with expected inflation, keeping real rates positive. This prevents overheating without hurting the growth recovery. It also balances diverse interests of savers and debtors.
Multiple supply shocks have ensured that the core inflation persists. In your view, when will the core inflation move towards 4%?
Supply chain unwinding and commodity softening are also persisting now. Since some demand components are slack and wage pressures are limited, there are no second round effects. We should, therefore, see core inflation also fall this year.
There are expectations that the dollar will weaken in 2023. Do you think it is good news for emerging economies like India?
Yes, pressures on emerging market currencies will abate. The rupee will strengthen somewhat but remain at competitive levels. Imported inflation will reduce. FPI outflows already reversed in mid-2022. Most of the US Federal tightening is over and seems to have been absorbed by markets without major upsets.
Do you think the government should postpone fiscal consolidation in this Budget in order to give growth a chance?
It is important not to increase expenditure in line with higher revenue as growth revives. This was the mistake of the high growth period of 2000s. Expenditure should be counter-cyclical, building buffers for bad times. Fiscal consolidation can decrease country risk premium and borrowing costs, and release almost half of central revenue tied up for interest payments.
However, aggressive consolidation should be avoided until private investment and exports robustly revive. Smooth pre-announced reduction paths for fiscal deficit (FD) (from 6.4 to between 5 and 6 to 4.5) would strengthen the credibility of Indian macroeconomic fundamentals. Even so, the still positive FD would, along with better composition of expenditure through infrastructure spending and well-targeted protection, help sustain demand even in a global slowdown.
What in your view are the main stumbling blocks for private sector capital expenditure? What would be your suggestion to the government as an economist?
Excessive monetary-financial tightening in the 2010s after excessive stimulus in the end of the 2000s – both of these aggravated external shocks. The pandemic period has shown it is possible to smooth external shocks and sustain domestic demand with counter-cyclical macroeconomic policy, while feasible reforms in line with technology and global trends smooth supply bottlenecks. If policy continues in this line, it will reduce uncertainty, which is a major stumbling block for private sector capital expenditure.
Do you think PMJKY should have continued beyond December? You have said in the past that free food scheme ensured that there is no second-round rise in rural real wages.
With economic recovery and better job prospects, it is time to taper food subsidies. Support for the poor continues through the PDS and the fertiliser subsidy reduces input costs and food prices. Raising agricultural productivity and moving to green practices are the sustainable way to keep food inflation low. Internalisation of the 4% inflation target by food price and other regulators is necessary for the success of inflation targeting. Support and other regulated prices should only rise at rates compatible with the target. Spikes should be temporary with any sharp rise reversed in time.