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Informist, Saturday, Aug 24, 2024

 

By Aaryan Khanna

 

--MPC Bhide: FY25 GDP growth above pre-pandemic long-period average

--MPC Bhide says achievable growth may be higher in future

--MPC Bhide says high economic growth unevenly spread at present

--MPC Bhide says external demand not rising as fast as it did

--MPC Bhide says consumption demand growing slowly

--MPC Bhide:Month-on-month CPI momentum in Jun-Sep is relatively high

--MPC Bhide: Must monitor month-on-month Jun-Sep CPI momentum

--MPC Bhide:Food inflation may remain high if rainfall not sufficient

--MPC Bhide sees sustained demand at moderate core inflation

 

NEW DELHI – India's high GDP growth is unevenly spread across the economy, and overall economic momentum is not robust in some sectors, according to Shashanka Bhide, external member of the Reserve Bank of India's Monetary Policy Committee.

 

"In some cases, supply capacities may be stretched and in others demand is lacking," Bhide told Informist in an email interview after the minutes of the August monetary policy review. "The external demand conditions are not rising as fast as they did, and consumption demand is also growing slowly."

 

India's achievable growth could increase in the future due to its demographic dividend, new technology, and other structural reforms. At current projections, however, the GDP is growing faster than the long-period average until the pre-pandemic period, Bhide said.

 

The RBI has projected India's GDP growth in 2024-25 (Apr-Mar) at 7.2%, slightly higher than the government's projection of a 6.5-7.0% real GDP growth.

 

Bhide acknowledged that high growth rates had allowed the committee to hold the repo rate at 6.50% for nine straight meetings, the longest that policy rates have not been tweaked since at least 2000. At the same time, he said that focussing on bringing inflation down to the RBI's 4% aim on a durable basis takes priority.

 

Bhide joined the three RBI members of the MPC in voting to keep the policy repo rate unchanged at 6.50% and retain the policy stance at "withdrawal of accommodation". The other two external members, Ashima Goyal and Jayanth Varma, dissented on the stance and voted for a rate cut. The tenures of the three members will end before the MPC's next scheduled meeting in October.

 

"The month-over-month price momentum is relatively high during Jun-Sep, and it would be important to monitor the situation for this period," Bhide said. "I believe that achieving a steady moderating trend to the target would benefit the current growth momentum as well."

Rise in fuel prices and input costs remaining low has also helped maintain low core inflation in recent months, Bhide said. In the coming months, pressures on core inflation may particularly go up because of increase in both rural and non-rural demand, the economist said. Core inflation has hovered near historic lows of 3% over the past few months.

 

"The price conditions in the services sector and infrastructure are expected to be firm in the short run. But overall, acceleration in consumption demand and export demand will help sustain demand for non-farm sector goods and services at moderate core inflation," Bhide, an honorary senior adviser at the National Council of Applied Economic Research, said.

 

Following is the full transcript of the interview, edited for grammar, in which Bhide also says a few words to his successors on the committee:

 

Q. What's your take on India's potential growth debate between your colleagues on the MPC? RBI Deputy Governor Michael Patra says India is outperforming its potential, while fellow external members on the panel feel growth even at 7.2% in 2024-25 (Apr-Mar) is below potential.

A. The aggregate output growth or GDP growth of more than 7% is certainly more than the average for a long period of, say 2012-13 to 2018-19. If one were to look at future trajectories where we get the benefit of new technologies, demographic dividend and other structural reforms, the achievable growth may be even higher.

 

For me, in the present scenario, the high growth is unevenly spread. In some cases, supply capacities may be stretched and in others demand is lacking. The external demand conditions are not rising as fast as they did, and consumption demand is also growing slowly. From an immediate policy perspective, prioritising inflation control is appropriate as the growth assessment is fairly strong.

 

Q. With the RBI's projections showing CPI inflation at 4.4% in Apr-Jun, were you still far away on voting for a rate cut?

A. It is Jul-Sep CPI inflation projected at 4.4%. As the minutes noted, this had the benefit of a favourable base effect. Going forward, projections are 4.7% in Oct-Dec and 4.3% in Jan-Mar. The month-over-month price momentum is relatively high during Jun-Sep, and it would be important to monitor the situation for this period. I believe that achieving a steady moderating trend to the target would benefit the current growth momentum as well.

 

Q. Has keeping the policy rate at 6.50% for the last nine policies helped growth in any way, or do you think it has only kept inflation in check?

A. It has certainly helped in the moderation of the inflation rate. And we have had fairly high growth rates during the period, which has helped the policy.

 

Q. You have highlighted risks to both growth and inflation. Any solutions you feel relevant from the RBI or the government at this juncture to pull down food inflation?

A. One key issue is the farm output in the current year. Unless the distribution of rainfall turns out to be adverse, expectation is one of rebound in agricultural output. Food inflation may remain high if the rainfall conditions are not satisfactory. While the measures to manage the supply conditions would be important for the government, moderating the overall price pressures would be the focus of monetary policy.

  

Q. Has core inflation, at around 3% over the past few months, worried you as being low in an economy like India?

A. We have also experienced a low rate of fuel price rise and input price conditions, which may support low core inflation. The price conditions in the services sector and infrastructure are expected to be firm in the short run. But overall, acceleration in consumption demand and export demand will help sustain demand for non-farm sector goods and services at moderate core inflation.

 

Q. Do you think you are missing an opportunity to participate in a policy pivot, with your term ending before October?

A. I will certainly miss the future policy pivot, October or later.

 

Q. Any guidance to your successors on this panel?

A. There will always be many challenges for the policy choices to address. I am sure the new panel will bring new perspectives and strengths that will guide the policy decisions.

 

Q. What kind of writing or academic work can we expect from you in the future?

A. No definite agenda. But I would like to remain engaged in understanding the trends in the economy - different sectors, segments, and writing would help to do this.  End

 

Edited by Ashish Shirke

 

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