After serving as chief economic advisor in the finance ministry since 2007, Arvind Virmani is set for his new responsibility as an executive director in the International Monetary Fund. His two-year tenure, which ended in June, has been extended till he joins the IMF in November. He talks to Vrishti Beniwal on his tenure and his reading of what is ahead. Excerpts:
How was your experience in the finance ministry?
I had an interesting two and a half years here, because of the challenges we faced. In 2007-08, we were faced with a big surge in capital inflows. I call it the crisis of plenty. After that came the global commodity boom of 2008-09. Prices of oil and many other commodities rose, leading to supply side inflationary pressures. And then there was the financial meltdown.
Did you see the financial crisis coming?
The sub-prime crisis had started 12 months before (the collapse of Lehman Brothers). As an observer, I was puzzled why they were not taking any steps to isolate the so-called toxic assets. So, when Lehman Brothers broke, that was a surprise to me. I had no idea of how big the impact of such a failure would be. No one anticipated that the market would just disappear for several months.
Is the worst behind us in terms of global slowdown?
I believe the economy would recover after a while, though things could go worse. There were pessimists who were saying we are going down the drain. I did not believe that, but as a realistic person one has to assign some probability. If the probability was two to five per cent, it has gone to zero.
With the Indian economy also recovering, would you change your growth forecast?
I had said that when we are assured of an L-shaped recovery in the global economy, the Indian economy would follow a U-shape pattern and the average growth rate would be around 7 per cent, adjusted for any shortfall in agriculture output due to the monsoon. The forecast remains the same.
Does the sharp rise in core data indicate recovery?
Any positive news is good news, but I do not give much weight to that data. Roads, ports and airports are infrastructure, but steel and oil are just inputs. It is not very clear how steel production, oil or refinery output links to overall growth.
To what extent would tax reforms help bridge the fiscal deficit?
The goods and services tax (GST) and the direct taxes code are the elements of sustainable revenue generation in future. Excise tax and service tax were reduced deliberately to give a stimulus. The introduction of GST would provide an appropriate timing to end the stimulus. So, when GST is implemented, it must be benchmarked to what it was before this tax reduction.
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Is this the time for government to put an end to subsidies?
Nobody says targeted subsidy should be done away with. Food subsidy is required for certain poor and hungry people. But if you do not adjust the price of oil and diesel, that is uncoordinated and unfocused subsidy. The objective of subsidy on kerosene and LPG is to make sure that people in rural areas and those who do not have electricity are able to cook their food and have light. It may be better to give those people subsidised solar lanterns or solar cookers.
With inflation rising, how do you expect interest rates to move?
We have to pay attention to both growth and inflation. Once the central bank is assured that growth is recovering to normal levels, it will start putting more weight on controlling inflation.
What will be your focus areas when you move to the IMF?
It will give me an opportunity to focus more on issues connected to India’s role in the global system. You are trying to do what is good for the fund, at the same time as representing your shareholders (India).