Revival In Rural Consumption Is Visible: Ashima Goyal
Category
đź“ş
TVTranscript
00:00Hello and welcome, you're watching Profit Insights on NDTV Profit and I'm your host
00:12Pallavi Nihata.
00:13Now, the MPC minutes are out and I'm joined by external member Ashima Goyal.
00:19Ma'am, thank you so much for taking time out for us.
00:22You're welcome.
00:23So, you know, to begin with a quick glance at the minutes appears to indicate that while
00:32you are confident relatively that inflation is transient because of the factors it is
00:41emanating from, on the other front, despite domestic growth having remained resilient,
00:49it is showing slight signs of weakness.
00:54So what is your take currently and how does that sort of fit into the broader MPC mandate?
01:02I mean the decision?
01:03Yeah, we've seen that the July inflation came in at below 4, right?
01:08It's 4.54.
01:10So the first time the MPC has, you know, the inflation is below the MPC's target.
01:16And while it's expected to rise again, but, you know, there's a very good monsoon.
01:22So that would be a dampener and I think that we might be pleasantly surprised downwards
01:27by inflation in the future.
01:30And as for growth, I think growth is quite robust.
01:33In Q1 there is a softening, but that could be related to, you know, the elections and
01:39the pause in government spending, general uncertainty for the private sector.
01:45And so again, we are seeing signs of revival of consumption in rural areas also, which
01:50is very positive.
01:51But my point is that even if growth is robust, as long as trend inflation is downward, especially
01:57poor inflation, which is the more long run sort of pattern, less volatile part of inflation,
02:05then we are actually, you know, we have room to grow further without raising inflation.
02:11So we are below our potential output.
02:14Even if growth is high, we can comfortably grow at a slightly higher pace without raising
02:21inflation.
02:23And since we have a large amount of unemployment and this is our catch-up period, we should
02:29try to grow at the maximum that we can with, of course, with macroeconomics debate.
02:35Okay.
02:36All right.
02:37So, you know, I do want to follow up on that.
02:40So then would it be fair to say at this point, you don't believe that the growth sacrifice
02:46per se is too much.
02:48You do expect growth to pick up from Q1, given factors such as the monsoon and maybe on the
02:54back of that slightly better demand going forward, would that sort of be the right way
02:58to look at it?
02:59You know, this is what a lot of people see, that growth is high, it is relatively robust,
03:05so there's no growth sacrifice.
03:06But the point I'm trying to emphasize is that our potential growth is even higher.
03:12So there is a growth sacrifice.
03:13Now compared to last year, we're growing 1% slower.
03:17And we all know that China and its catch-up period grew in double digits, right?
03:23So in a period of structural change, you don't know what the potential output is.
03:28And if trend inflation is downwards, then that means that you are below your potential
03:36output.
03:37So to that extent, there is a growth sacrifice.
03:41And also because it acts with a lag, right?
03:45If real interest today, especially in terms of poor inflation, are pretty high, it's going
03:51to have an effect down the road.
03:56And at that time, it would be too late to do anything about it.
03:59Okay, all right.
04:01So that broadly explains your stance and your vote for a 25 basis points rate cut as well
04:10in this policy.
04:11But, you know, I do want to ask you once again on inflation, given that there has been a
04:17whole lot of debate once again, in recent days, over whether the MPC needs to probably
04:26then target core, or look at core more specifically, versus continuing to look at the headline.
04:33Would you have a perspective on that as well then?
04:36Yeah, I had written this in a couple of minutes back that we should give forecasts of core
04:43as well as headline, right?
04:45Even though headline can remain our target, the MPC, but there should be more attention,
04:52explicit attention paid to core.
04:55Because core, as the research shows, is the most stable part of inflation, it's the long
05:01term trend.
05:02And my research shows that headline inflation converges to core.
05:07And households' expectations in the long run are influenced by core inflation.
05:13So therefore, giving forecasts of core and aggregate demand, the real interest rate
05:19influences core directly, doesn't influence volatile, can influence food inflation only
05:26through expectations, etc.
05:29So that is why I think it will help to anchor inflation expectations and for convergence
05:35of headline inflation to core, if we give more attention to core in the monetary policy.
05:44Got it.
05:45And another question, of course, that's sort of, you know, something that we've been debating
05:51about for a while, is whether the current food inflation figures that we're seeing,
05:58whether that is, you know, sort of spilling over into the non-food inflation component as well.
06:07But you know, from your commentary, would it be safe to assume that you continue to
06:11be of the opinion?
06:13And like you've mentioned, food inflation has shown signs of easing, inflation is on
06:19a downward trend.
06:20And hence, possibly the spillover effect we're talking about might not be so much of a concern.
06:25Would that be right?
06:27Yes, because if you look at the core inflation components, there's no broad-based inflation.
06:32This slight rise we saw in momentum this month was just due to the telecom price rise.
06:38And we are seeing overall global commodity prices softening as well as our own inflation,
06:44our own food is good.
06:46So I don't see any signs of broad-based uptick in core inflation.
06:50In fact, this is a point I make and I want to emphasize here, that, you know, there is
06:56a view, a conservative view, the view in the RBI, and because inflation is their main objective,
07:03it is that it will revert, core inflation will revert, they expect it to revert to mean.
07:11But the point is that we have seen trend inflation coming down in India over the last 10 years
07:16as we've had inflation down.
07:19And so that mean is downwards now, it's not the old mean, you know.
07:25So even though core is at a lifetime low of 3.1 and services core is 2.7, maybe they rise,
07:33but why do you think that they will rise above the target?
07:37You know, the target should have a signaling and anchoring effect.
07:44And since inflation has been down the past 10 years, we can expect core to trend, you
07:49know, not to revert to its old mean.
07:52Right.
07:53Right.
07:54Please continue.
07:55Okay.
07:56No, so just to understand that better.
08:04So broadly, while core inflation might have bottomed out and while we do expect future
08:11prints to print a tad higher, core inflation is still not necessarily a point of concern
08:18that the MPC needs to worry about, because it is expected to remain range bound at about
08:23the 4% target.
08:25Would that be right?
08:26In the longer run, even if it reverts to a mean, I don't think the mean will be above
08:314.
08:32Yeah.
08:33And it might continue because, you know, the other thing is when we see that aggregate
08:36demand affects food and real interest rates have been around one in terms of head report
08:43rate, but we have large spreads in the Indian system.
08:46So industry borrows, consumers borrow at higher rates.
08:49So these real rates have kept demand sort of muted and brought down core inflation to
08:58three below the target, right?
09:01So now as inflation falls, the real interest rate is rising and monetary policy is becoming
09:07more restrictive.
09:08Then if you think that this real rate really affected core inflation in the past, you would
09:12expect core inflation to fall further, you know?
09:17And that means further softening of demand, further sort of negative impulse to growth,
09:23you know?
09:24Which is not what the Indian economy needs at this point in time.
09:28Whatever the target, again, paying more attention to core means that, you know, the RBI, the
09:35MPC, the agents of the population, the voters who have elected a government who gives us
09:43the target we have to aim for.
09:46So it is not correct for us to have a core inflation that is below the target.
09:51Okay.
09:52All right.
09:53Okay.
09:54So, you know, in your last minutes as well, you had some interesting commentary and you
09:58spoke about how the inflation figure itself can also be an indicator of growth potential.
10:05This time around as well, you did highlight that, you know, while growth is broadly resilient
10:11despite some signs of weakness in Q1, it still remains below its potential.
10:19So could you explain a little bit more on that?
10:22You know, this is a very simple point, but people seem to find it very difficult to appreciate.
10:29See the idea is, you know, I've highlighted and recently the RBI came out with these estimates
10:35of the neutral interest rate, you know, the natural interest rate, the equilibrium rate
10:39at which inflation is expected to be a target and output at potential.
10:45And they are saying that this will be rising as growth rises.
10:48I'm saying that there are theoretical reasons in a country such as India where we are in
10:53transition, this will not necessarily happen.
10:55We're also seeing spreads come down with more financial stability and less volatility, more
11:00stability in the macroeconomy in general.
11:05Right.
11:06So there are controversies in measuring this neutral or equilibrium rate.
11:12Yeah.
11:13So you can judge what it is by looking at inflation.
11:17There is a literature on this, you know, it says what are potential indicator variables.
11:21And among those is inflation, growth, etc.
11:25So inflation primarily, if inflation is below the target.
11:29It means that your actual policy rate is above equilibrium, right?
11:36Because the inflation is heading below target, core inflation is below target.
11:43And if inflation is below target, that means you are below potential output, your output
11:47is lower than it could be because inflation is below the target.
11:52Yeah.
11:53So this is just a simple indicator to cut across all the controversies in measuring
11:59equilibrium interest rates by saying that the inflation trend itself allows you to infer
12:06something about what the natural or neutral equilibrium interest rate is, where potential
12:14output is, where output is related to potential, you know.
12:19Is that clear now?
12:20Absolutely.
12:21Yes.
12:22Thank you so much for that explanation.
12:23But ma'am, this was also your last MPC as external member.
12:29You also summarized some of the principles for the MPC.
12:35And I do want to understand, you know, is this also, was this also one of the meetings
12:42which saw greater divergence between the external and the internal members of the RBI?
12:49And what does one make of this dissent in that case?
12:53Well, again, I have some research which suggests that dissent is very healthy, it's good for
12:59the economy, for analysts like you, and generally it forces you to think more.
13:04Absolutely.
13:05And question your assumptions and, you know, because you play a large role, you give feedback
13:11to all of you, they say that inflation and, you know, rates need to be higher and there's
13:19no need for a cut that affects, influences the Reserve Bank also.
13:23So these arguments are for you also to think, right, what are our priorities today?
13:28Just what is stable government, we are in a position to grow, and for political stability,
13:34it's very, very important to increase employment, that is a priority for us.
13:39So there's no reason to keep monetary policy, especially since aggregate demand is very
13:43interest sensitive in an economy like India with a lot of young people.
13:48So there's no need to keep monetary policy tighter than necessary to bring inflation
13:52to the target and to allow growth to rise to potential.
13:55Right?
13:56Right.
13:57And divergence, we have a very healthy discussion and I've also put on record that I think RBI
14:05is one of the pillars of the economy and it is, it will, it has, we have to thank the
14:10policies of the past three years for allowing India to be the fastest growing and most stable
14:17in macro.
14:18You know, one of the emerging markets is doing the best around the world today.
14:21Yeah.
14:22One of the larger economies that's doing the best.
14:26And I'm sure it will go on doing what's the best for the economy, but all of us can give
14:30an input in that.
14:31And in general, I would say that we've had a lot of agreement in this MPC, but points
14:37of dissent have not been when there are turning points, you know, a lot of people can disagree
14:42and then you need to change, you know, whether you're tightening or you're loosening.
14:48At the pandemic time, everybody agreed you needed to cut rates.
14:52And again, there was some divergence, but external members felt rates should have been,
14:55you know, tightening should commence a little earlier than it did.
15:00All right.
15:01Thank you so much, ma'am, for taking time out for us.
15:04This was most helpful as always.
15:06You're welcome.