‘The story of inflation is not yet over’
‘The actions of Indian monetary authorities will depend on how quickly they want the inflation to come down to 4 per cent.’
C Rangarajan has been governor of the Reserve Bank of India, chairman of the 12th Finance Commission and head of the Prime Minister’s Economic Advisory Council to guide and direct the economy.
“Inflation has come down below the outer limit of 6 per cent. But it is still well above the mandated target of four per cent. Thus, the task of controlling inflation has not gone away,” Dr Rangarajan, who is now in his nineties, tells Indivjal Dhasmana/Business Standard.
The first of a two-part interview:
The Economic Survey for 2022-2023 had projected the economy to grow by 6-6.8 per cent with 6.5 per cent as baseline projection for the current financial year.
But since then, various projections have put the growth in the range of 5.9 to 6.5 per cent with the external situation worsening.
What is your projection of economic growth for 2023-2024?
There are always difficulties in making short term forecasts. 2023-2024 may perhaps be the first year for which the forecast is made over a near normal base.
The growth rate of 2023-2024 will indicate the possible rate of growth during the next few years.
At present, the forecasts range from 6.5 per cent by RBI to 5.9 per cent by IMF.
My own expectation is that the growth rate will be around 6 per cent.
It will go below 6 per cent only if the monsoon is below normal because of El Nino.
The other uncertainty is how far the Russia-Ukraine war will escalate.
The developed economies will suffer a shock if it gets worse, with the attendant consequences for developing countries.
The possibility of the growth rate touching 6.5 per cent depends on an improvement in the international situation.
Domestically, the key to growth lies in a distinct improvement in private sector investment.
Many experts gave out pessimistic views when the economy grew by merely 4.4 per cent during the third quarter of 2022-2023. What is your take?
GDP growth started declining from 2011-2012, after a strong growth in the previous six years.
In 2012-2013, it touched a low of 5.5 per cent. Subsequently, there has been a rise, but it touched again a low of 3.7 per cent in 2019-2020.
Then there was the onset of Covid with the economy contracting by 5.8 per cent in 2020-2921.
There was a sharp increase in the following year, followed by another year of positive growth.
Over the three year period, the compound annual growth rate (CAGR) is 3.2 per cent.
As already mentioned, the expectation is that in the coming year, the growth rate will be between 6 and 6.5 per cent.
There has certainly been a decline in growth rate from the high levels achieved during 2005 to 2010.
India’s Gross Fixed Capital Formation (GFCF) at current prices has fallen to 27.3 per cent of GDP in 2020-21.
It was as high as 34.3 per cent in 2011-2012. Even with a GFCF of 28 per cent to 29 per cent, we could have had a higher growth rate.
The slight pickup in GFCF last year is more due to additional capital expenditure by the government.
If the growth is to be sustained at 6 to 7 per cent, private investment needs to pick up.
The monetary policy committee sprung a surprise when it maintained a status quo on the repo rate in its April monetary policy announcement.
However, it said it would remain alert to the developing situation on the inflation front.
What are your expectations on monetary action, going forward in 2023-2024 given the fact that the retail price inflation fell below six per cent in March and core inflation also came down to a 10-month low of six per cent?
The monetary authorities have taken a temporary pause.
Inflation has come down below the outer limit of 6 per cent. But it is still well above the mandated target of four per cent.
Thus, the task of controlling inflation has not gone away.
It is wrong to argue that all inflation in India is due to supply disruptions or shocks.
The major factor contributing to inflation is liquidity or money.
During the Covid period, all countries embarked on an expansionary fiscal policy and the fiscal deficit soared and liquidity expanded.
Monetary authorities need to watch the expansion in liquidity.
Even though policy rate may be the signal, it is intimately related to liquidity and reserve money.
The actions of Indian monetary authorities will also depend on how quickly they want the inflation to come down to 4 per cent.
Developed countries despite many problems they face want to get their inflation down to their target quickly.
The latest monetary policy statement for India refers only to inflation going down to 5.2 per cent in 2023-2024.
What is important to note is that the story of inflation is not yet over. Some action may still be required.
States such as Rajasthan, Himachal Pradesh, Chhattisgarh and Jharkhand have reverted to the old pension system.
The Centre has also appointed a committee to reform the new pension system.
What is your view on how governments should decide the matter?
The action on the pension system depends very much on the priorities of governments in terms of expenditure.
The Seventh Pay Commission recommended substantial increases in emoluments and pension benefits to government employees. These were accepted.
A guaranteed pension system with DA attached is a big burden.
The new pension system gives to retired government employees a pension based on the returns on accumulated savings and contributions of the government.
This is a fair way of compensating employees.
Already establishment expenditure constitutes a big segment of government expenditures.
It is in this context the new pension system was instituted.
Even if one wanted to go back to the old pension scheme, the formula for fixing pension cannot remain the same.
It has to be modified taking into account the government’s various responsibilities.
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