Offering a cautiously optimistic outlook for the country’s economy, Varma said on Sunday the growth prospects for fiscal years 2022-23 and 2023-24 are “reasonable”, even after factoring in the possibility of a protracted period of geopolitical tensions and rising commodity prices.
Amid persistent high inflationary pressures of late, the MPC of the Reserve Bank of India is moving toward a hawkish stance, with the reference rate raising 90 basis points in five weeks to a two-year high of 4.90 percent. A 40 basis point hike was made earlier this month.
In an interview with PTI, Varma, an outside member of the MPC, said the pandemic is the biggest test for the system yet and the flexible inflation targeting regime has proved up to the task.
“The inflationary phase has lasted longer than we would have liked and will continue to last longer than we would like, but I have no doubt that inflation will be brought down to target levels in the medium term.
“India’s economy has barely recovered from the pandemic and we must be careful not to impose an unbearable sacrifice on growth in our attempt to tame inflation too abruptly,” Varma said.
His comments also come amid concerns expressed in certain quarters that the central bank could have started raising interest rates a little earlier to fight inflation. For the first time since August 2018, the MPC raised interest rates by 40 basis points in early May.
The RBI has a mandate to keep retail inflation at 4 percent with a 2 percent margin either side. The central bank’s six-member MPC, headed by the RBI governor, decides policy rates with this goal in mind.
Varma, professor of finance and accounting at IIM Ahmedabad, said he sees the risks to inflation as balanced at this point, as both geopolitical and weather-related uncertainties could go either way.
“Financial conditions have tightened both globally and domestically and this would help contain the build-up of demand-side pressures,” he said.
Varma said there were several reasons for persistently high inflation, including the Russo-Ukrainian war and supply shocks for food and other items, adding that supply-side problems had been more important than demand-side pressures.
“Some of the inflationary pressures come from global factors (crude oil, cooking oil and other commodities). Part of the shock also comes from the impact of unfavorable weather conditions on domestic agricultural production,” he noted.
Retail inflation eased to 7.04 percent in May but remained above the RBI’s upper tolerance limit of 6 percent for the fifth straight month.
According to Varma, the global economy is facing significant headwinds and it would take time for the world to return to high growth.
“But in this depressed context today I am cautiously optimistic on the Indian economy… India’s economic recovery has been resilient given the shocks from the Ukraine war and the growth outlook for 2022-23 and 2023. 24 is reasonable even assuming a protracted period of geopolitical tensions and elevated commodity prices,” he said.
In its third monetary policy of 2022-23, the RBI maintained its GDP growth forecast of 7.2 percent for the current fiscal year, but warned of negative effects from geopolitical tensions and a slowdown in the global economy.
The World Bank has lowered India’s economic growth forecast for the current fiscal year to 7.5 percent.
The economy grew 8.7 percent in the last fiscal year (2021-22), while there was a 6.6 percent contraction in 2020-21.
