KV Subramanian, former chief economic advisor and executive director of the International Monetary Fund (IMF), said India’s economic growth of 13.5% in the June quarter could pick up by 50-60 basis points, as more indicators catch up. In an interview, Subramaniam said that the National Statistical Office (NSO) should incorporate high frequency data such as digital transactions and Goods and Services Tax collection. On tightening monetary policy, he said a hike in interest rates does not have a significant impact on consumption, but it may impact private investment. He cautioned that if the central bank’s monetary policy committee hikes rates and then decides to cut them to boost investment, the entire cut may not be passed on to the end consumers. Edited excerpt:
Was GDP growth lower than expected at 13.5% in the first quarter?
If you look at the aggregate figures, the three primary contributors to GDP—consumption, investment and exports—have increased by more than 40% year-on-year. By my back-of-the-envelope calculations, real GDP growth would have been closer to 20% if the price of crude had been lower and our imports had only grown at the rate of exports. Of course, this is out of our control. So our fundamentals are looking upwards.
Are the GDP numbers underestimated, especially as factory output and other high-frequency indicators register strong growth?
When we look at the first estimate of quarterly GDP versus the revised estimate, generally, there has been an upward revision. And that’s something I think the Office for National Statistics must consider. They should now use some high-frequency indicators, such as digital economy transactions, GST data, etc. I think they need to start thinking about including that in the first estimate for quarterly growth. In this case, I think the increase in GDP growth between the first estimate and the revised estimate would be adjusted for between 50 and 60 basis points.
First quarter earnings indicated that the company is under margin pressure. And, now, with the monetary tightening environment, what impact do you see on private investment?
Monetary policy has been tight on some policy announcements, yet private investment has grown by more than 20% over the past year. So yes, monetary policy and policy rate hikes can have an effect. The Reserve Bank of India needs to keep in mind that investment is by far the most affected by the tightening of monetary policy. But, at the same time, Corporate India emerged much, much stronger than most commentators credited it with during the COVID-19 period. The banking sector is also looking healthy and has grown by 13%. I view the 20% year-over-year investment growth as a sign that corporates are slowly settling down.
What is your view on private investment?
I am cautiously optimistic about private investment. Investments are affected much more by what economists call the ‘second moment effect’. It’s basically (greater) risk uncertainty than at the first moment. And, investments, if you look at it over a three-year period, have been hit far more by uncertainty, first by Covid-19 and then by the Ukraine war. Some exaggerated comments are about the impact of the global economy on the Indian economy, which is wrong. People start adjusting to the uncertainty and get into the act of investing, which shows a 20% increase in private investment. So, when monetary policy tightening stops, it will add to the environment for investment, but overall, we may be in a phase of higher investment.
How long do you expect the monetary tightening cycle to continue?
While it is for the Monetary Policy Committee to decide, my view would be that they should take a few factors into account when deciding on this- first, within consumption, are durable goods such as televisions, refrigerators, cars, or two-wheelers. Only those Indians consume through credit. And that consumption is a very small proportion of the overall consumption. In other words, increases in interest rates don’t actually have a very significant effect on consumption, but they can have an effect on private investment. Usually, our banks increase lending rates when monetary policy is tight, but not necessarily cut as much when monetary policy is relaxed. A 100 basis point-tightening, almost one for one, will be transmitted on the lending rate, but in the case of a 100 basis point-loosen, only 40 to 50 basis points of that gets transmitted on the lending rate. So there’s this asymmetry because of the behavioral aspects of our banking sector. So the Monetary Policy Committee needs to keep in mind that if they raise more and then try to cut back to trigger investment, the full cut may not apply. Therefore, instead of just looking at it from a different, tightening point of view or a different loosening point of view, they should look at it with a complete view of tightening and loosening.
catch all corporate news And updates on Live Mint. download mint news app to receive daily market update & Live business News,