jayanth varma: Prominent economist Jayanth Varma sees most sectors recovering, except those with high contact intensity
Contact-intensive industries like hospitality, beauty and wellness, travel have been hit hard by the coronavirus pandemic as people are reluctant to venture out.
“I am quite positive about the ongoing economic recovery which I believe will quickly take us above pre-pandemic levels in most sectors of the economy, with the exception of energy intensive services. contact, ”he said.
Varma, who is a member of the monetary policy committee, pointed to high inflation as a key risk going forward. He said it’s easy to contain higher inflation expectations at the start rather than when they are taking hold.
In an interview with PTI, Varma said: “High inflation for such a long time creates the risk that households and businesses will start to expect high inflation in the future as well. Such entrenched inflation expectations make the task of monetary policy more difficult.
“A key factor holding back inflation expectations is the credibility of the central bank. To maintain that credibility, the monetary policy committee must react decisively to inflationary pressures as they begin to take hold in the economy. “, added Varma.
He also stressed that the real challenge for the economy will be to reverse the slowdown that began in 2018.
“In my opinion, sustained growth mainly depends on a revival of capital investment by the corporate sector and I am hopeful about this as well,” he said, confident in the capacity of the Indian financial sector. to support economic recovery.
A sharp rebound in the manufacturing sector and a weak base enabled the Indian economy to post growth of 20.1% in the first quarter of the current fiscal year. However, growth in contact-intensive sectors remained sluggish due to the impact of the second wave on the economy.
When asked when private investment would resume in India, Varma said capital investment would pick up when capacity utilization reached a much higher level than is currently seen.
On the positive side, he noted that capacity utilization is gradually improving in many industries.
“The recovery in domestic demand will be one of the factors leading to an increase in capacity utilization,” Varma said, adding that another factor would be robust global growth which would provide a market for Indian exports.
Noting that capital flows are a function of relative growth prospects and relative interest rates, he said if the global economy recovered and India’s economic growth also rebounded, outflows would be dampened.
“Likewise, whether rising interest rates in the United States lead to capital outflows also depends on the trajectory of Indian interest rates,” he said.
Importantly, Varma said large domestic savings and capital pools can help offset capital outflows. “Large foreign currency reserves also offer a modest degree of protection,” he said.
Regarding the disconnect between the real economy and the stock market, Varma said the stock market is forward looking and is more interested in future growth prospects than the current level of growth.
“The expectation of a rapid rebound in growth after the second wave is clearly one of the factors behind the boom,” he said.
Second, the abundance of liquidity (both domestic and global) also drives up the prices of stocks, real estate and other assets, the eminent economist said, adding that it is the phenomenon of inflation. asset prices which concerns all central banks while deciding monetary policy.
According to Varma, the emergence of new emerging industries mainly in technology and related sectors that have not been affected by the downturn in the rest of the economy.
“This is visible in the high valuation given to several Indian startups this year. Finally, of course, many observers fear that part of the boom is due to irrational investors,” he said.
The Reserve Bank of India (RBI) lowered the country’s growth projection for the current fiscal year to 9.5%, from 10.5% previously estimated, while the World Bank forecast that the economy India is expected to grow 8.3% in 2021.
(With entries from PTI)