Ongoing economic recovery will take India above pre-pandemic levels in most sectors: Economist Jayanth Varma

New Delhi, September 2

Eminent economist Jayanth R Varma on Thursday said the ongoing economic recovery would quickly take India above the pre-pandemic levels in most sectors of the economy, adding that the improved health of the Indian financial sector is also a positive factor for economic growth.

Varma, who is also a member of the Monetary Policy Committee (MPC) of the Reserve Bank, in an interview to PTI said high and persistent inflation is a major constraint on monetary policy.

“I am quite positive about the ongoing economic recovery which will, I think, quickly take us above the pre-pandemic levels in most sectors of the economy except contact-intensive services,” he said.

Varma added that beyond that point, the challenge is to reverse the slowdown that began around 2018, and achieve sustained robust growth.

“Sustained growth in my view depends mainly on a revival of capital investment by the business sector and I am hopeful about that as well,” he said, adding that the improved health of the Indian financial sector is also a positive factor for economic growth.

The Indian economy grew by a record 20.1 per cent in the April-June quarter, helped by a very weak base of last year and a sharp rebound in the manufacturing and services sectors in spite of a devastating second wave of Covid.

India is now on track to achieving the world’s fastest growth this year.

On the prices front, he said that inflation was above 6 per cent in 2020-21, is likely to be above 5.5 per cent in 2021-22, and is projected to be above 5 per cent even in the first quarter of 2022-23.

“Elevated inflation for such a long period creates the risk that households and businesses will start expecting high inflation in future as well. Such an entrenchment of inflation expectations makes the task of monetary policy more difficult,” Varma noted.

According to him, it is usually much easier to nip high inflationary expectations in the bud than it is to change these expectations after they have become entrenched.

“One key factor that dampens inflation expectations is the credibility of the central bank. To maintain this credibility, the Monetary Policy Committee has to respond decisively to inflationary pressures as they begin to take root in the economy,” he opined.

Asked when private investment will pick up in India, Varma said capital investment will pick up when capacity utilization rises to a significantly higher level than what is observed at present.

On the positive side, he noted that capacity utilisation is gradually improving in many industries. PTI