Gita Gopinath, currently John Zwaanstra Professor of International Studies and Economics, Department of Economics, Harvard University, and Economic Advisor to the Kerala Chief Minister, was in Mumbai for Exim Bank’s 33rd Commencement Day Annual Lecture on — ‘Dollar Dominance in Trade: Facts and Implications’. Gopinath, one of the few tenured professors and who is also on the economic advisory panel of the Federal Reserve Bank of New York, spoke with Shaji Vikraman. Edited excerpts:
You have done considerable work on business cycles in emerging markets. How do you view India’s current cycle?
It always helps when the global economy is doing well. It’s the first time since the financial crisis that we have a situation where the advanced economies and emerging markets look positive in their group. So that will look good for India. For the long term, there are lots of reforms in place like the GST, bankruptcy code, ease of doing business. That’s promising.
A major worry for investors and policymakers is revival of private investment…
Yes, that has been a big problem for India in the past few years. And one big issue with that was non-performing assets. That problem is obviously getting addressed now. There is re-capitalisation of banks, the bankruptcy reform process. None of this is going to happen overnight. But, at the same time, because of a turnaround in the world economy, that can have a positive impact.
There are quite a few economists who now reckon that the economy will grow at sub-7 per cent in the next year or two. Do you also believe so?
Yes, I think that probably the worst in terms of demonetisation is behind us. With GST there might still be some disruption for another quarter or two but then there is more of the upside there. Yes, it is not easy to ramp up growth to 8 per cent. I think a 7 per cent ballpark seems reasonable.
Do you think that there is a risk of fiscal slippages next year considering it is the terminal year before the national polls?
I don’t think that the government should deviate from its fiscally conservative stand. It already seems to be suggesting a little bit of that. I don’t think they should. Last time when India went on a fiscal binge, it was just after the crisis and that had inflationary consequences that took a long time to come down. What is interesting is that the growth that has come for India in the last few quarters, except the most recent one, was driven a lot by the government and less by the private sector.
One of the challenges now is that there is little room for easing on both the fiscal and monetary front. Doesn’t that narrow Centre’s options?
I don’t think that a country should be growing on the basis of fiscal policy and monetary policy. I think of those as being more of stabilising mechanisms. What India needs is to grow much more on a trend basis and that should come from reforms, ease of doing business and all of that which do not require more fiscal spending or low interest rates.
But, what are those reforms?
I think it is absolutely fair to say that in the last several months, setting aside demonetisation, they have made commendable progress on reforms and that continues. So, you have to continue those things and I don’t think people can complain that this government has been complacent.
Do we need to have inflation targeting?
I don’t agree that inflation targeting has got such a bad name. I think where it has got a bad name is in advanced economies. An important difference between India and the US is that the latter doesn’t have an inflation target but there is an implicit 2 per cent target. India’s, on the other hand, is 4 per cent, which is a pretty reasonable. If India was targeting 2 per cent then that would be too constraining but currently is it a good range.
India now has a formal inflation targeting framework. From a distance and an academic standpoint, what’s your assessment of the MPC’s working so far?
The working of the MPC has been very good. A few months ago, I thought they were a little too conservative by not cutting rates by more. But now seeing what is happening with the inflation, I don’t see any space for rate hikes for sure but I can see why they would hold on. I think the bigger difference is when I sit on the advisory board of New York Fed Reserve is the quality of data you have to make decisions in terms of investment rates, unemployment data, job creation. And I do research in India and what worries me is the kind of data you have to work with. Ultimately, all of these decisions are data-driven. So, that is one space where policy-wise, it needs more work.