In an exclusive interview with Outlook Business, external member of RBI's rate-setting panel Ashima Goyal explains why she voted for a rate cut
The consumer price index (CPI) inflation is progressing well towards the target of 4 per cent and wage growth in India will have to be aligned with that, says Ashima Goyal, external member of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC).
In an exclusive interview with Outlook Business, she said, “Markets will not deliver on high wage expectations unless there is excess demand for labour, which is not the case at present, except in a few pockets, where productivity is also rising.”
In the minutes of the MPC’s meeting held on June 7, she argued that supply shocks were no longer having any significant impact on inflation or inflation expectations, and therefore, joined fellow external member Jayanth Varma in voting for a rate cut.
Edited Excerpts:
You have changed your stance in the latest policy review and voted for a rate cut. Will you suggest that the threat of inflation is over for now?
It is not over, but policy remains sufficiently restrictive to contain it, even with a 25 bps (basis-point) rate cut. In a deeper and more diversified economy, commodity price shocks are lower in size and less persistent. As inflation expectations become well anchored, such shocks can be looked through.
How much of a control do you see government having on food inflation at present? The food distribution chain has not improved significantly over the years and the ability to intervene has also reduced.
There is progress on long term measures that improve agricultural productivity, crop choices, marketing and logistics. Populous China was able to grow in double digits because high farm productivity kept food prices low. Agricultural diversification, rising exports, better rural roads and growing use of agri-tech, all point to an ongoing sustainable transformation in Indian agriculture.
What is your assessment of the target to bring CPI inflation to 4 per cent on a durable basis? Economists have flagged inflationary pressures such as expectations of increase in income among workers across sectors as a potential risk to this target.
As inflation expectations converge, CPI inflation is progressing well towards 4 per cent. Price, wage setters and regulators have to benchmark their increases with it. Markets will not deliver on high wage expectations unless there is excess demand for labour, which is not the case at present, except in a few pockets, where productivity is also rising. If wages rise with productivity, it is not inflationary.
There has been an argument that India is not creating enough jobs with the current growth momentum. Do you think the problem lies in the growth rate or is it the structure of the growth?
Social engineering is seldom successful. India is lucky to have good growth after a long post -independence stagnation when state production and redistribution was strong. Since the 1990s liberalisation, higher growth averaging 6 per cent has lifted 400 million (people) out of poverty, the middle class has expanded from 10 per cent to 30 per cent. Those earning above $10,000 now number 50-60 million. More and more are shifting to higher productivity jobs. Let us not stall the process but try to safely speed it up.
What is your take on the growth trajectory given the fiscal consolidation pressure post the inclusion of India's government bonds into the JP Morgan Emerging Markets Bond Index? Is private investment ready to take the baton and drive growth?
Higher growth and tax reform is giving buoyant revenues with space enough to maintain essential expenditures while staying on the path of fiscal consolidation. Providing stimulus through better quality of expenditure has worked well and will continue. Private investment is also rising sustainably. Otherwise the investment share of GDP (gross-domestic product), as per data on March 24, could not have risen to 33.9 per cent. Public investment share is below 5 per cent. New listed firms are rising rapidly. All this requires investment.