“Despite the Covid-19 severe shock, India's macroeconomy is more healthy and ready for faster growth than it has been for a long time. That recovery from both the first and second waves was faster than expected points towards inherent strengths of the economy," she said during an interview with news agency PTI.
The Reserve Bank of India (RBI) has slashed India's GDP growth projection for the current financial year to 9.5 per cent from 10.5 per cent estimated earlier, while the World Bank has projected India's economy to grow at 8.3 per cent in 2021.
Goyal, who also is a member of the Monetary Policy Committee (MPC), said that private investment in sectors that have shown capacity constraints are already seeing a rise in private investment.
The eminent economist further observed that although many Indian start-ups are doing well, “we should not, however, expect the private infrastructure investment boom of the 2000s."
“Portfolio inflows into India are not only due to the quantitative easing of rich countries' central banks, they are also attracted by India's growth prospects. All emerging markets do not get such inflows," Goyal stated.
She pointed out that the government is leading infrastructure investment, while more durable foreign direct investment has a larger share in recent capital inflows.
"India, moreover, has enough reserves to ride out any volatility while ensuring interest rates are aligned to the domestic policy cycle," she told PTI.
On recent calls for using India's substantial forex reserves for infrastructure development or recapitalisation of public sector banks, the economist pointed out that the nation's forex reserves are not earned by an excess of exports over imports. They give security but are costly, she added
"They are borrowed reserves built up from foreign inflows that create liabilities. Reserves have to be kept in a liquid form and capital-value preserved to meet repayment obligations," she said.
Goyal opined that the best way to prevent excessive reserve accumulation is to increase absorption of foreign inflows in productive investment.
"Until this happens, inflows could be mitigated using market-based capital flow management tools. A push for better international regulation and safety nets should also continue," she said.
On the question of high CPI and WPI inflation being matter of concern, Goyal said inflation is currently within tolerance bands.
"Signs of persistence are limited implying it is largely due to Covid-19 related global and domestic supply-side bottlenecks and should be transient, provided the government undertakes complementary supply-side actions," she noted.
Commenting on the bull run in stock markets even amidst economic deceleration, Goyal said stock markets are forward looking, so normally they do move ahead of the real economy.
"Low interest rates also increase the present discounted value of future earnings and reduce the attractiveness of fixed deposits. A wider Indian public has started participating in stock markets giving them a more diversified portfolio of assets," she said.
Noting that different investor types help make markets more stable and reduce volatility, Goyal said “gradual rise in policy interest rates need not lead to a major correction if the rise accompanies a growth recovery, which is positive for markets and long term growth prospects remain good."
On the recently-announced National Monetisation Pipeline, Goyal said this an innovative measure for financing new infrastructure. She pointed out that private participation is easier since there is no project risk, which is the most difficult for private players to handle.
"But PPP contracts have to strike a fine balance between government revenues, private profits and reasonable user charges. Good regulation is a prerequisite to ensure the latter," she cautioned.
On RBI's plan to launch its own digital currency, Goyal said correctly designed digital currency would have many advantages.
"It could build on India's exemplary innovations in payment systems, ease cross-border flows, reduce costs, improve transparency, financial inclusion and monetary policy transmission all in partnership with banks," she said.
On further role of RBI in assisting economic recovery, the MPC member said the central bank has done a lot through timely yet temporary measures that limit long-term dependence and risky-behaviour. According to her, some measures are already reversed.
“Targeted liquidity programmes that ensure liquidity reaches every corner of the economy should continue. Further normalisation has to be slow and gradual conditional on recovery so as to anchor inflation expectations yet sustain growth and ensure financial stability," she said.
On fiscal measures that can be taken to support households in distress, Goyal said that the fiscal deficit is already in double digits and interest payments take up the biggest chunk of revenue.
"Given our very large population, protection transfers of the advanced economy type would require our deficits to rise to 50 per cent of GDP, which is not feasible," she said.
Noting that funds have to be well and carefully used, she said that free food helps the very poor and disabled but the best targeted support for most households in distress is to increase job availability and capacity to work through better support for health, training and education.
"The focus on infrastructure is also useful since it creates jobs now and makes it easier to work later," she said.
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India's macroeconomy more healthy, ready for faster growth: Ashima Goyal - Mint
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