Indian economy's fundamentals strong; private investment picking up: Arvind Panagariya

Mr. Panagariya, in an interview to PTI, however also emphasised that the country needs to conquer COVID-19 as quickly and decisively as possible.

The fundamentals of the Indian economy are sound as the real GDP in Q3 and Q4 of FY’21 already crossed the pre-pandemic level, former NITI Aayog vice-chairman Arvind Panagariya said on Sunday.

Mr. Panagariya, in an interview to PTI, however also emphasised that the country needs to conquer COVID-19 as quickly and decisively as possible.

"Here the news on vaccination front is excellent. I only wish that we as citizens do our bit and religiously wear masks when coming in contact with others," he said.

"In the third as well as fourth quarter of 2020-21, real GDP had already crossed pre-Covid-19 level… these facts tell me that the fundamentals of the economy are sound," he said.

Meanwhile, the Indian economy grew by a record 20.1% in the April-June quarter this fiscal, helped by a very weak base of last year and a sharp rebound in the manufacturing and services sectors in spite of a devastating second wave of COVID-19.

The Reserve Bank of India (RBI) has lowered the country’s growth projection for the current financial year to 9.5 % from 10.5% estimated earlier, while the World Bank has projected India’s economy to grow at 8.3% in 2021.

Mr. Panagariya, a professor of economics at Columbia University pointed out that contrary to the general impression, private investment in India has certainly already picked up.

"In both Q3 and Q4 of FY21, Gross Fixed Capital Formation (GFCF) at 33% and 34.3% of GDP, respectively, was higher than in the corresponding (pre-Covid-19) quarters a year earlier," he said.

Replying to a question on foreign capital inflows, the eminent economist said, “Let us be clear that they have not resulted just from quantitative easing (QE)”

"True, QE encourages capital to move out of the advanced economies but that does not guarantee that it will come to India and not go to other emerging market economies," he said adding that it chooses India because of the high returns that the Indian economy promises.

As tapering happens in the advanced economies, Mr. Panagariya said the threat of some reversal naturally remains though the final outcome will depend on how much higher the returns in India remain relative to those in the advanced economies.

On the stock market boom at a time when economic growth has slowed down, he said there may be a disconnect but not necessarily.

Noting that stock market prices are driven by the expectations of future returns, he said, "Given the high potential of the Indian economy, what we see in terms of high stock prices may well be a rational response by equity investors." On recent calls for using the huge Forex reserves for infrastructure development or recapitalisation of public sector banks, the eminent economist said he generally does not approve of mixing up monetary policy and RBI FX operations with fiscal policy.

According to Mr. Panagariya, whatever funds that flow from the RBI to the government should be done transparently in terms of the usual annual transfers out of RBI earnings. Noting that the ability of the RBI to defend the exchange rate in the presence of large capital flows depends on its FX reserves, he said, "As a rule, we should restrain from undermining this ability by raiding the FX reserves for fiscal purposes."

Asked if high CPI and WPI inflation is a matter of concern, Mr. Panagariya said indeed, at a time when the economy is still in the recovery phase, inflation in the range of 6 % is a good thing.

"Profits of firms and expenditures and revenues of the government are measured in nominal terms and slightly higher inflation helps healthy growth in them at a time when the economy is operating at less than full capacity," he said.

Mr. Panagariya observed that the 4% target with a 2% band around it should not be seen as a mandate to hold inflation always below 4%.

Asked what fiscal measures are necessary to support households in distress, he said India’s social safety nets have expanded significantly in the last one and a half decades.

"I do not see how we can borrow more even when the goal is as noble as helping the poor without putting the burden on the future generations through increased debt," he said.

Mr. Panagariya suggested, "If we must expand social safety nets further at current levels of income, I would favour further rejigging of the existing subsidies from richer recipients to the poor." India has recently rejigged existing subsidies from richer recipients to the poor, for example, diverting LPG subsidy from urban households to rural BPL households.

On the periodic labour force survey (PLFS) data, both annual and quarterly showing a marked deterioration in the quality of jobs, Mr. Panagariya said, "We certainly need to move workers out of agriculture into industry and services. From this perspective, the reverse movement is disturbing."

He, however, added that though, he would not read too much in the 2019-20 PLFS survey without a closer examination of what role in these estimates has played by the worker movement during March-June 2020.

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