We should be willing to accept inflation between 4-5% for several quarters as the price of avoiding a growth shock, says monetary policy committee’s external member Jayanth Varma. He tells Ajay Ramanathan that global economy and the pace of revival of private capital expenditure will drive economic growth in the second half of this financial year. Excerpts:
Q. In the minutes, you have said that the medium term growth outlook will be stronger than what it was during the last meeting, several headwinds still remain. What are some of these risks?
A. There are three headwinds. First, external demand is weak due to the sluggishness in the world economy. Second, the revival in private capital expenditure is still too tentative and muted. Third, fiscal consolidation amounts to a withdrawal of the pandemic era government spending stimulus.
Q. Do you believe that there is a growing asymmetry between the MPC stance and the commentary? In your view, what factors will drive the MPC to reconsider the current stance?
A. I find it difficult to understand the stance as well as its underlying logic. As such, I have no idea what would lead to a change in the stance.
Q. By when can we expect the inflation to be brought down to 4% target?
A. I have been saying for quite some time now that while there is great urgency for bringing inflation well below the upper tolerance band, we can be more patient when it comes to gliding inflation to the target. A more rapid pace of reduction could impose an intolerable growth sacrifice. We should be willing to accept inflation between 4% and 5% for several quarters as the price of avoiding a growth shock.
Q. There are still some concerns over rural demand ahead of the festival season. How do you assess this?
A. I agree that there are concerns about this, but the indicators are looking a little better than they did couple of months back.
Q. What factors will drive economic growth in the second half of this financial year?
A. I think the key drivers will be the global economy and the pace of revival of private capital expenditure.
Q. Early July-September numbers suggest that bank loans to corporates have been strong. Is this an indication of a full-fledged revival in private capex?
A. We must keep our fingers crossed on this, and hope that the long awaited and much needed private capex revival does materialise.