The present economic recovery would swiftly lift India above pre-pandemic levels in most sectors of the economy, according to eminent economist Jayanth R Varma, who also noted that the improved health of India’s financial sector is a good factor for economic growth.
High and persistent inflation, according to Varma, who is also a member of the Reserve Bank’s Monetary Policy Committee (MPC), is a fundamental restraint on monetary policy. In most areas of the economy, except contact-intensive services, he stated, “I am fairly optimistic about the ongoing economic recovery.”
“Sustained development, in my opinion, is mostly dependent on a rebound of capital investment by the business sector, which I am optimistic about,” he said, adding that the better health of India’s financial sector is also a positive element for economic growth.
Despite a catastrophic second wave of COVID-19, the Indian economy grew by a record 20.1 percent in the April-June quarter, aided by a relatively weak base from the previous year and a remarkable rebound in the manufacturing and services sectors. This year, India is on course to have the world’s fastest growth rate.
In terms of prices, he stated that inflation was above 6% in 2020-21, will likely be above 5.5 percent in 2021-22, and will likely be above 5% in the first quarter of 2022-23.
“Long periods of high inflation raise the risk that individuals and businesses may begin to expect high inflation in the future as well. The role of monetary management becomes more difficult when inflation expectations get entrenched,” Varma observed. It is usually much easier to nip high inflationary expectations in the bud than it is to reverse them after they have been entrenched, according to him.
“The central bank’s credibility is one important aspect that dampens inflation expectations. To maintain its credibility, the Monetary Policy Committee must act decisively when inflationary forces emerge in the economy, he believes.
When asked when private investment in India will pick up, Varma stated that capital investment will start up when capacity utilization reaches a considerably higher level than it is now.
If the world economy recovers and Indian economic growth likewise returns, he says capital outflows will be restrained. When it comes to outflows, he noted, “the direction of Indian interest rates is just as important.”
As a result, several Indian startups have been valued at a high level in the past year. As a final note, many analysts are concerned that irrational investors are driving some of the surges,” he said. After previously forecasting 10.5 percent growth for the current fiscal year, the Reserve Bank of India (RBI) has now decreased its projection to 9.5%. The world bank estimates 8.3% growth for India in 2021.