The Tuesday Interview | Recession in advanced economies brings down global demand, affects India: S C Garg

Rising inflation across the globe has prompted central banks to tighten money supply. This week, the RBI too is expected to raise key interest rates to douse spiralling prices. But will that really help cool prices? Former finance secretary S C Garg talks to Annapurna Singh of DH.

With central banks in advanced economies going in for aggressive interest rate hikes to tame inflation, their economies are likely to slip into recession. Do you think India can benefit from that?

It is not just the central banks tightening money supply that is contributing to the march of many advanced economies into recession. Withdrawal of fiscal freebies is also slowly dampening demand. It is strange to think that India can ‘benefit’ from recession in the advanced economies. Recession there would reduce global demand and adversely impact our exports as well. During all the global recessions this century, GDP growth in India has also suffered. Of course, inflation would cool down in India as soon as global demand cools down. However, fresh investment suffers during such times.

Does India need to worry about what is happening in the Asian economies?

While some Asian countries are increasing interest rates, two major economies in Asia -- China and Japan -- are not doing it. This has made the Indian rupee appreciate against the yuan and the yen, the currencies of these two major economies. Our policy action should be guided by what serves our real interests best in the circumstances.

Many brokerages and financial institutions have cut India’s growth forecast for FY23. At what rate do you see India growing in the medium to long term?

The Indian economy is stuck in a low growth groove for quite some time. It is likely to grow overall by 7% in 2022-23. In the medium term, if no serious reforms are initiated in agriculture, industry and services, India would struggle to grow at about 6% in 2023-24 and 5% in next two years thereafter. India is a little over $3 trillion economy. Taking into account the likely nominal GDP growth and likely depreciation vis-à-vis the US dollar, India may touch the $5 trillion GDP mark only in 2026-27.

Inflation continues to be a worry for India but much of it is due to the demand-supply mismatch in the wake of Covid and the Russia-Ukraine war.

India did not pursue a consumer demand push policy to deal with the aftermath of Covid-19. It is wrong to think that the Russia-Ukraine war led to any significant inflationary impact on the Indian economy. Inflation in India has been severe, and is caused by higher commodity prices and supply shocks evident even before this war. In fact, global commodity prices, with the exception of a few, have come down in the last six months after the war broke out. Inflation in consumer prices had been relatively mild in India until 2021-22. Some inflation in vegetables and spices was on account of local factors. It is only for the last few months that inflation in cereals is rearing its head, which, despite bans and high export tariffs, is likely to keep consumer price inflation at somewhat elevated levels. I believe wholesale price inflation should get into single digits by December and further decline to 5-7% in 2023-24. Retail price inflation is likely to remain higher than 6% for many months.

Do you think interest rate hikes by the RBI are prompted by supply constraints?

Interest rate and calibration in money and credit supply by the RBI has not really worked in the last two years. It had flooded the system with liquidity in the aftermath of Covid-19 and kept interest rates low by bringing down the reverse repo rate to a very low 3.35%. Yield control has become a popular policy tool. These policies resulted in lower interest rates and abundant liquidity but did not result in good credit demand. Until last financial year, credit growth remained in single digits. It is only now, over the last few months, when RBI is hiking interest rates and liquidity has almost disappeared, that the credit demand has picked up significantly. Bank deposit growth rate has gone down. Credit card outstandings have started piling up. All this indicates depleted savings and sustained credit demand. While raising interest rates is both necessary and advisable, it is not likely to make much impact on the inflation trajectory in India.

India’s economy is growing but data points suggest its employment is falling. Is this kind of jobless economic growth sustainable?

So long as value addition and GDP growth keep up, policy makers should not be too worried about unemployment. Rather, they should think about how to productively engage the surplus labour—in acquisition of higher order skills, in sports, entertainment, social work. There might be options to engage labour over fewer workdays and in public works. The world is changing. The consequences of ‘jobless growth’ need to be managed, and we should not just look at the chimera of creating jobs for everyone.

The Russia-Ukraine war is threatening to slow down global merchandise trade volumes. Can ‘Make in India’ and exports power India’s economic growth?

There is massive re-ordering of global economic, production, trade and financial flows because of the Ukraine-Russia war. The world seems to be getting into two blocks– the US led block and China-led block. We have good trade relations with both. We have massive strength in services and agriculture. Industry is not our big strength. Digitisation, renewables and production of environmental goods offer great opportunities. We should not be fixated with Make in India only in the industry sector. We should focus on ‘Value Added in India’ in all these sectors. That would help India grow.