Mumbai: Ahead of the Reserve Bank of India's Monetary Policy Committee meeting on Tuesday and Wednesday, Surjit Bhalla, noted economist and part-time member of Prime Minister’s Economic Advisory Council, on Monday reiterated his demand for a deep cut in the policy rate.
Speaking to reporters on the sidelines of a discussion hosted by the Asia Society India Centre, on his latest book 'The New Wealth of Nations', Bhalla said, “Either the RBI needs to cut rates by 200 basis points over a period of time to bring it (real repo rate) to one percent or else inflation must rise at the same rate.”
“The MPC had a target of 1.25 percent real repo rate – repo rate minus the inflation rate. However, the average real repo rate since last 14 months has been three percent, which is double the RBI’s target,” he added.
Bhalla urged the RBI to not be carried away by the recent jump in the growth rate from 5.6 to 6.3 percent, adding that the central bank too had projected a potential growth rate of over 7.5 percent.
However, Bhalla rued the MPC’s reluctance to cut rates and said, “We have the third highest real interest rates in the world. The average inflation rate is around three percent since last year. Previously, it was around 8-9 percent. The world is becoming competitive, yet we have high interest rates.”
Bhalla sought an explanation from the RBI as to why the central bank decreased the interest rates in October 2016, when the inflation rate was around five percent, but is unwilling to do so now when the inflation rate is much lower.
The economist believed that even the 1.25 percent target of the RBI is high for markets with low inflation rates and excessive competition like India.
Bhalla told reporters that the members of the MPC are not allowed to speak to the media, which he said hampers effective communication over key policy matters.
On the impact of the goods and services tax on the economy, he told Firstpost, “We need to give GST some time. It is a major tax reform of the Modi government and very few countries have attempted it on such a large scale. I applaud the government for admitting to its mistake openly. In the next six months, the glitches will be gone, and we will see some positive effects.”
Bhalla said the government needed to prioritise boosting economic growth rates to create more jobs for the youth, while he blamed the MPC for not doing its role in maximising India’s growth potential.
“The central point is why the MPC is not cutting down the interest rates to reduce the cost of capital. MPC’s reluctance to do so means that no businesses can survive as the cost of working capital is high and no entrepreneur will be willing to hire new people,” the PMEAC member said.
Bhalla believed that Prime Minister Narendra Modi’s pet project Skill India has been going in the right direction till now.
“It has gone through its own set of problems. Hopefully, the Indian economy will see the benefit from this programme,” he told Firstpost.
The economist added that acquiring skills is increasingly becoming important in the modern competitive world, since just basic education won’t suffice now.
On India’s sluggish export figures, Bhalla rejected calls for devaluation of the rupee and added that the exchange rate is competitive. He said that India’s exports have taken a hit due to high tax rates as well as higher cost of capital.
“Exports will certainly improve if the RBI reduced the interest rates, while the government slashed taxes,” the economist said.
Bhalla lauded the Modi government for kickstarting the reform process in the banking sector adding that the reforms in sectors such as education, healthcare and agriculture can begin from 2019 onwards.
“In the past, reforms meant reducing or increasing taxes. This is history now. A committee has been set up under Arbind Modi to consider direct tax system reforms. We already have the GST, which has reformed the indirect tax system. Then from 2019 onwards, we will see reforms in other sectors too,” he said.
Updated Date: Dec 05, 2017 22:59 PM