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Journalism of Courage
Former Reserve Bank of India (RBI) Governor DUVVURI SUBBARAO spoke to GEORGE MATHEW about the RBI prioritising growth over inflation, need for job intensive growth, risks to the economy, digital currency and the manufacturing push.
Balancing between growth and inflation is always a challenge for monetary policy, and is much more so in uncertain times such as now. Going forward, there will be upward pressure on inflation because of higher commodity prices particularly of crude which is skirting around $90 per barrel, firms passing on input price pressures to output prices, hardened inflation expectations and the services sector reopening. The RBI seems to have factored in significant easing of supply-side bottlenecks and a good Rabi harvest in its inflation estimates. RBI has judged that the ongoing recovery is still incomplete and needs policy support. Should the real economy conditions evolve contrary to these calculations, I am sure the RBI will act swiftly to make a course correction.
There will certainly be taper but possibly no tantrums. The Fed is expected to raise rates faster than earlier thought because of rising inflation in the US. In response, capital inflows into emerging markets such as India which came in search of quick returns will exit. Some exit has in fact already happened. Nevertheless, these outflows are unlikely to cause any macro instability because our external sector today is a lot stronger than in 2013. There is no hidden pressure in the exchange rate. Notwithstanding its recent widening, the current account is still within safe limits and our foreign exchange reserves are plentiful. Besides, relatively stable flows like FDI and NRI deposits have been steady. There is of course need for caution but no need for anxiety.
Central bank digital currencies (CBDCs) are still largely uncharted territory. Only about a half dozen countries, all relatively small economies, have issued CBDCs so far. So, there is not much experience to fall back on. I find it curious that most advanced economies are still circumspect about CBDCs while emerging economies like India and China are moving forward briskly. Evidently, the motivations for them are different. I think emerging markets in particular are driven by fear and opportunity… Fear that in the absence of a CBDC, their monetary and financial stability will be threatened by some credible private cryptocurrency issued by a technology company such as Facebook, for example. They also see an opportunity in CBDCs of reducing the cost of printing and distributing currency. The bottomline though is this. For people who have already shifted to UPI-based payments such as PhonePe or Paytm, for example, I don’t believe the arrival of the e-rupee will in any way change the user experience.
Another wave of covid is an obvious risk. Global recovery getting off track or the geopolitical situation deteriorating are two big external risks. On the domestic front, rising inflation and slipping up on execution of the massive public investment, especially at the state level, are two prominent risks. Any self-doubt on the part of the government in implementing reforms, particularly privatization, will also dent investor confidence.
Budget-making is all about prioritization. It is true that millions of people are still in distress. But even if the FM put money in their hands, it’s unlikely that they would have spent it given how uncertain they feel about their near- and medium-term future. What they want is not doles but regular incomes through steady jobs.
The sizeable public investment, especially in construction, and the private investment it will stimulate, will of course create jobs. But the question is – is that enough given the enormity of the jobs crisis? Jobs have been lost because of growth slowdown but also because of the shift in activity from the labour-intensive informal sector to capital intensive formal sector. We need not just growth, but job intensive growth.
The finance minister had difficult choices to make given huge spending pressures and limited resources. In the event she decided to borrow and spend more on capex. This will not only generate growth in the short term but also build a base for stronger growth in the future. Since we are at last seeing some light at the end of the tunnel of the twin balance sheet problem, the hope and expectation is that public investment will ‘crowd in’ private investment and put the economy on a virtuous growth cycle. But ramping up execution, which has been our main weakness, will be key.
