India Withstood Geopolitical Shocks; Will Navigate Future Uncertainties Too: MPC's Jayanth R Varma

The Indian economy has withstood all geopolitical shocks in the last couple of years and it will also be able to navigate the uncertainties that lie ahead, RBI Monetary Policy Committee (MPC) member Jayanth R Varma said on Sunday.

Varma further said he expects a benign outcome in 2024 where inflation comes down and growth remains robust.

"The Indian economy has withstood all these shocks ( Russia-Ukraine war, Israel-Hamas war, rising oil prices, Houthi attacks) in the last couple of years, and I do not believe that the geopolitical situation will be significantly worse in coming months than what we experienced in the recent past," he told PTI in an interview.

Moreover, Varma, a professor at the Indian Institute of Management, Ahmedabad, said the continued slowdown in China has led to sharply reduced demand for energy and other commodities, and this too has ameliorated the adverse effects of supply shock.

"On the whole, I have a great deal of confidence that India will be able to navigate the uncertainties that lie ahead," he said.

India's economy is projected to grow by 7.3 per cent in the current fiscal, higher than 7.2 per cent in 2022-23. As per the International Monetary Fund's (IMF) World Economic Outlook, the global growth is estimated to decelerate from 3.5 per cent in 2022 to 3 per cent in 2023 and further to 2.9 per cent in 2024.

The situation around the Bab-el-Mandeb Strait, a crucial shipping route connecting the Red Sea and the Mediterranean Sea to the Indian Ocean, has escalated due to recent attacks by Yemen-based Houthi militants.

Due to these attacks, the shippers are taking consignments through the Cape of Good Hope, resulting in delays of almost 14 days and also higher freight and insurance costs. The Red Sea route is also crucial for energy shipments.

Also, on his outlook on inflation for 2024, the eminent economist said he expects a benign outcome where inflation trends down and growth remains robust. "I expect inflation to trend downward towards the target (apart from transient food price spikes)," he said.

According to him, food price shocks last year have taken the form of transient spikes that have been quickly corrected. Most importantly, these spikes have not led to any disanchoring of inflationary expectations, and, this has prevented a generalization of food price inflation. "I think this would be the case in 2024 as well," Varma said.

Noting that globally, the inflation surge was the result of excessively loose pandemic-era monetary policy followed by multiple supply shocks, he said neither of these factors operate today.

Varma pointed out that the monetary policy is now restrictive, supply shocks have dissipated and prices of energy and commodities have corrected.

According to the latest government data, retail inflation rose at the fastest pace in four months in December 2023 at 5.69 per cent, on account of an increase in prices of vegetables, pulses, and spices.

The Reserve Bank of India has been tasked by the government to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on either side.

When asked if the government needs to make a more realistic assessment of its medium-term fiscal deficit target, he said India has been on the path of fiscal consolidation in the post COVID period, and this has to be partially offset by the monetary policy to avoid adverse growth outcomes.

On what the global outlook means for India as over 50 countries are due to hold elections in 2024, Varma opined that the actions of different countries are driven more by their self-interest than the personality of their leaders.

"As such, I am not too worried about electoral outcomes in the rest of the world," he said, adding that moreover, it is only in a few of the elections that there is a serious risk of the emergence of political leaderships with drastically different agendas.