Economy to feel pinch of higher commodity prices: CEA V Anantha Nageswaran

'Employment generation is both a near-term and long-term priority', said Nageswaran

Inflation will definitely impact the Indian economy, says Chief Economic Advisor V Anantha Nageswaran. He considers the RBI’s new GDP growth estimate of 7.2 per cent as the floor for this year, and also feels that the current account deficit will be higher than expected but manageable. In an email interaction with Arup Roychoudhury, the CEA says the buffers built into the Budget should hold in spite of higher spending, and that India’s debt profile was sustainable. Edited excerpts:

The Indian economy has come out of three Covid waves and now faces headwinds from elevated crude prices and supply chain disruptions due to the war in Europe. How do you assess the economy in 2022-23 (FY23)?

The economy has proven its resilience. Even the contraction estimated earlier for the first wave of the pandemic has been revised lower. The economy will definitely feel the impact of higher commodity prices in general and crude oil in particular. That is why the Reserve Bank of India (RBI), too, has marked down its growth estimate for 2022-23 from 7.8 per cent to 7.2 per cent. The current account deficit will be higher due to the higher oil import bill. Further, economic recovery will also lead to higher non-oil, non-gold imports. In general, I do see the RBI growth estimate for 2022-23 as the floor, and the current account deficit will be manageable.

You said at an event that the US Fed raising rates and crude oil price volatility were the biggest headwinds faced by the Indian economy. Would you consider the new lockdowns in China due to the re-emergence of Covid as another major headwind?

It is too early to assess that as a major headwind. We do not have enough information. Perhaps, if it does not persist too far into the current financial year, it may not be.

Jobless growth has been a charge levelled against several governments, including the current one. How deep do you think the unemploy­ment problem has been since the pandemic, and what can be done to fix it?

Employment generation is both a near-term and long-term priority. The government takes it very seriously, and hence its various fiscal and non-fiscal policy initiatives. Capital expenditure has a higher multiplier effect than direct cash transfers with respect to employment generation.

Hence, the government has budgeted for higher capital expenditure even as the private sector waits for clear demand visibility before embarking on a major capex spend. Even there, some encouraging early signs are visible.

The government’s moratorium on the application of the Insolvency and Bankruptcy Code for small businesses and the Emergency Credit Line Guarantee Scheme were meant to prevent businesses from collapsing, which could have led to higher unemployment.

They have delivered on those. It should not be too difficult to imagine the counter-factual scenario in the absence of these support measures. The latest consumer confidence survey and the industrial outlook survey released by the RBI around the monetary policy meeting suggest that the labour market is improving.

The Budget 2022-23 made a huge emphasis on higher capital expenditure. In the light of the crisis in Ukraine and its impact on oil prices, is the Budget prepared to handle higher inflation and its impact on interest burden, reve­nue and expenditure assump­tions? As a matter of fiscal transp­arency, should fresh numbers be presented in Parliament?

The buffers built into the budget should hold.

What steps do you think should be taken to widen the direct taxes base and their share in GDP?

Many steps have been and are being taken. These include lower tax rates with fewer exemptions, faceless assessment, and integration of information between direct and indirect taxes. They are bearing fruit and will continue to bear fruit over time.

Your views on the government’s growing debt burden and rising interest payments liability.

India’s debt profile is sustainable and the government is committed to medium-term fiscal consolidation.