The release of pent-up consumption, witnessed after the Covid-19 pandemic, has moderated, but there are signs of a “broad-based” consumption revival, Reserve Bank of India’s (RBI) monetary policy committee (MPC) external member Ashima Goyal tells Piyush Shukla and Priyansh Verma in an interview. Payments banks are a sustainable business model, provided they take regulatory norms seriously, he says. Excerpts:
Real rural wage growth has been negative in H1 FY24. When can we see its reversal?
Most wage-earning rural households receive free food and benefit from other schemes so their effective real wage growth is higher. In the 2010s, real rural wage growth was in double digits because food inflation was high and this second-round effect led to high persistent inflation. In an inflation-targeting regime, real wage growth should not exceed productivity growth. Rural incomes can rise sustainally with greater availability of and migration to more productive jobs.
If consumption stays weak, would a 7% growth in FY25 feasible?
While the release of pent-up consumption demand may be moderating there are signs of consumption pick-up becoming more broad-based, even in rural areas. The RBI’s consumer confidence survey shows continuing improvement in household’s employment and income expectations.
Do these factors, along with continued moderation of inflationary pressure, not make a case for cutting rates in the next meeting?
There are sufficient uncertainties regarding both growth and inflation to make it worthwhile to wait for more data. High frequency indicators show a growth revival in January and credit growth remains robust. While last year supply shocks were transitory, it will be good to see if the same happens this year and trend inflation continues to fall.
What supply side measures are needed to prevent frequent food price shocks?
Markets should also expand supply in response to food price shocks, through procurement from diverse regions. It should not just be the government that has to respond to food price spikes. It cannot do everything. Markets need to become better integrated and flexible. Advanced economies do not have the kind of food shocks we do, because of such better integration.
The RBI imposed severe restrictions on Paytm Payments Bank in January, essentially stopping its core business. Do payments banks have a sustainable business model?
Paytm Payments Bank problems started because they were not KYC-compliant despite being given repeated warnings and adequate time. The business model as such is sustainable. Other small banks are doing well. But all entities must take regulatory norms seriously. This is essential for financial stability and for their own reputation and long-term survival.
Is mobilising deposits becoming a structural issue as lenders are unable to match pace of credit growth with deposits.
At present aggregate deposits still exceed credit, but their growth is lagging. Over time, banks have to take action to bring deposit and credit growth into balance. For example, they need to raise both loan and deposit rates. Liquidity fixes are only short-term.