What does RBI ex-Guv Subbarao think of India's $5-trn economy goal?

After a 7% economic contraction in 2020-21 financial year, India is eyeing over 9% growth in FY22. However, with extreme job losses, migration of labour from high-productive to low-productive jobs, and high inflation, policy makers may have to rethink the target of a $5-trillion economy by 2025. In an interview with Nikita Vashisht, former Reserve Bank Governor D Subbarao explained why doubling the economy in 4 years might be too ambitious. Highlights of the Q&A: 

What’s the state of the economy as we are coming out of the second Covid wave?

• Economy contracted by 7.3% last year, estimated to grow 9.5-10% in FY22

• V-shaped recovery only in technical sense

• Growth lower than what it would have been if there was no pandemic

• Income loss is distressing, especially in a country like India

• Pandemic has left (economic) scars; need to be sensitive about them

How do we bridge the inequality gap?

• Need to generate employment

• Labour shifting from manufacturing to low-productivity agri sector

• The reverse should have been happening

Will 'Atmanirbhar' package be enough? 

• Atmanirbhar package a wide canvas

• But it’s not a solution to the employment problem

• Employment issue worsening; need to enhance skills

The private sector won’t invest in capex till there is demand. As incomes getting squeezed and disposal income of people is lower, their spending power will be curtailed. How do we get out of this conundrum? 

• Export demand can trigger investment demand

• Domestic consumption demand will follow

• Investment demand can hopefully pick up next year

Would you have dealt with the economic situation differently during the pandemic if you were at the helm of the RBI?

• Not really, RBI has done a great job based on the advice received

• The challenge now is to exit the expansionary policy in a non-disruptive way

Any way by which we can start exiting this expansionary policy?

• Expectation of liquidity withdrawal, and increase in reverse repo

• Need to keep the markets informed

Are NPA troubles behind us now?

• The worst seems to be over

• Large corporates are mostly deleveraged; banks' fundraising is better

• Not creating NPAs at the same pace as earlier

Do you foresee any operational challenges for the 'bad bank'?

• No prior experience

• Key challenges: Price agreement, bidders back out, security receipts dishonoured, existing promoters trying to get back in the game

• Approach issues with an open mind

Do you see any challenges in the Rs 6-trillion asset monetisation plan?

• Challenges will be there, but should still chase this aggressively

• Worry points: Bidding process transparency, dispute resolution, clear performance parameters, contract flexibility

Can India achieve the target of becoming $5-trillion economy by 2024-25?

• 2025 looks difficult

• Targets need to be challenging but realisable.