Capital investment to be resumed in the old economy; decent growth likely in FY23, says Jayanth R Varma

Prominent economist Jayanth R Varma expressed hope on Sunday that in a few quarters capital investment would start to pick up even in the old economy, and said the next financial year should also see decent growth.

Varma, who is also a member of the Reserve Bank’s Monetary Policy Committee (MPC), said in an interview with PTI that inflation is a concern, but at present it is the persistence of inflation rather than its level which is a matter of concern.

“I’m quite optimistic about the Indian economy and its growth prospects…Next year (2022-23) should also see decent growth,” he said.

Read also : Indian economy expected to grow 8.3% in FY22 (World Bank)

According to Varma, the pre-pandemic level of economic activity has already been exceeded, and the rest of this fiscal year should also see further recovery.

He noted that calendar year 2021 has seen dozens of new economy companies receive significant funding in both private and public equity markets and that these companies would also have a positive impact on the rest of the world. economy.

“I’m hopeful that in a few quarters capital investment will start to pick up as well, even in the old economy,” the prominent economist said.

Asked about the threat of the new COVID variant to the economy, he said the Omicron variant creates uncertainty, but he thinks the world is slowly starting to live with the Covid-19 virus.

“We should expect more new variants of the virus to emerge, but as vaccination coverage improves the virus becomes less dangerous,” he said, adding that health precautions like masks and social distancing have become entrenched in “our habits and in organizational systems”. and process”.

As a result, Varma said most sectors of the economy are now able to operate with minimal risk to employees and customers.

“This reduces the risks of slowing economic growth,” he observed.

The new, potentially more contagious B.1.1.529 variant was first reported to the World Health Organization (WHO) from South Africa on November 24 and has been designated as a “variant of concern” by the world body, which named it “Omicron”. “.

The Reserve Bank of India (RBI) has lowered the growth projection for the current financial year to 9.5% from 10.5% previously estimated, while the IMF has forecast growth of 9.5% in 2021 and of 8.5% next year. .

Read also : India’s economy shows signs of recovery, recovery in 19 out of 22 green indicators

Regarding high inflation, Varma pointed out that a few months ago the CPI inflation exceeded the upper tolerance range of 6%, but more recently the CPI has been in a good position. in the fork.

According to him, the concern is that inflation will not come down to the 4% target and that it risks stabilizing at 5% for too long.

“The rise in core inflation, together with WPI inflation, suggests that CPI inflation could remain elevated through 2022-23.

“I think monetary policy needs to be aware of this risk and we need to be prepared to prevent such an outcome,” he said.

Retail price inflation edged up to a three-month high of 4.91% in November, mainly due to higher food prices, while wholesale price-based inflation increased. jumped over a decade, to 14.23%, mainly due to hardening prices for mineral oils, base metals, crude oil and natural gas.

Responding to a question about cryptocurrencies, Varma said he thinks a strong and confident country like India should not be afraid of cryptocurrencies.

“Properly regulated cryptocurrencies pose no threat to a country with sound economic management and well-functioning regulatory frameworks, so there is no case of a ban,” he asserted.

Noting that cryptocurrencies, like any other financial product, pose investor protection issues, he said, “there is a need for a strong regulatory regime to address them.”

According to Varma, regulators around the world have developed mechanisms to manage these risks and India should also follow this path.

India plans to introduce a bill in parliament to address the challenges posed by unregulated cryptocurrencies. Currently, there are no special regulations or bans on the use of cryptocurrencies in the country.

Asked about the impact of the “taper tantrum” or the withdrawal of monetary stimulus by the US Federal Reserve on India, he said the Indian economy was much more resilient on the external front than it was. in 2013.

“I expect monetary policy to be able to focus on domestic policy imperatives; we can well afford to let the exchange rate be determined by market forces,” Varma said.

Varma felt that in any case, using the interest rate to achieve an exchange rate target would be inconsistent with the inflation targeting framework that is in place today.

The taper tantrum began in mid-2013 when the Fed hinted that it would reverse its accommodative monetary policy.

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