Supply shock was responsible for the high inflation in the first quarter of the current fiscal year and expected it to drop as supply returns.
The Reserve Bank of India has maintained a wait-and-watch stand in cutting repo rate amid a possibility of high inflation. However, the Indian economy can tolerate 6-7 per cent inflation, and RBI must not be too obsessed with keeping the inflation low, said former NITI Ayog Vice-Chairman Arvind Panagariya. RBI should work harder to prevent appreciation of the rupee in order to prevent erosion of the value of India’s exports, Arvind Panagariya added while speaking at the 47th National Management Convention of All India Management Association (AIMA). He further said that the supply shock was responsible for the high inflation in the first quarter of the current fiscal year and expected it to drop as supply returns.
The noted economist also said that India’s GDP growth has fallen since 2018 due to high growth in the first four years of the Modi government, and to get back to more than 7 per cent growth rate, India must open itself to free trade and recapitalize banks urgently. The Indian economy plunged to a record low of a 23.9 per cent contraction in Q1 FY21.
While the Reserve Bank had recently introduced a provision of loan restructuring to give relief to borrowers after the moratorium ended, Arvind panagariya said that restructuring loans will only delay NPAs and bankruptcies, and not prevent those. He also recalled that the economy had paid heavily for the delay in the Insolvency and Bankruptcy Code, and he estimated that a credit collapse will happen again if the problem is not addressed immediately.
Meanwhile, in a separate session of the same event, SBI Chairman Rajnish Kumar pointed out that interest rate cuts had not led to an increase in investment, despite the banks passing on the rate cuts to the customers. Rajnish Kumar said that credit growth had been slow this year as capital expenditure was slower than the usual pace. He underlined that the banks are being prudent as in the last crisis in 2008, banks had increased lending by diluting norms and the country had paid a high price for that.