RBI MPC member calls on political parties to inform voters about impact of price-distorting subsidies

New Delhi: Giveaways are never ‘free’ and when political parties offer such schemes, they should be required to clarify funding and trade-offs for voters, RBI Monetary Policy Committee (MPC) member Ashima Goyal said on Sunday. , adding that it would reduce the temptation. towards a “competitive populism”. Goyal added that a cost is imposed somewhere when governments provide freebies, but it is worth incurring for public goods and services that build capacity.Also Read – RBI May Set 7.23% Cut-off Yield on New 10-Year Bond: Report

“Gifts are never free…especially harmful are subsidies that distort prices,” she told PTI in an interview. Read also – HDFC Bank raises interest rates on term deposits | Check the new rates here

Noting that this harms production and resource allocation and imposes significant indirect costs, such as the falling water table in Punjab due to free electricity, Goyal said these giveaways come at the expense of poor quality health, education, air and water that hurt the poor the most. . Also Read – India hid Russian origin of fuel shipped and it ‘bothers’ US: RBI Deputy Governor

“When parties put forward platforms, they must be required to make funding and those trade-offs clear to voters. This would reduce the temptation of competitive populism,” explained the eminent economist.

Prime Minister Narendra Modi has in recent days denounced the competitive populism of extending “rewaris” (free) which is not only a waste of taxpayers’ money but also an economic disaster that could hamper the will of the India to become atmanirbhar (autonomous).

His comments were seen directed at parties like the Aam Aadmi Party (AAP) which, ahead of parliamentary elections in states like Punjab and more recently Gujarat, have promised, among other things, electricity and electricity. free water.

Earlier this month, the Supreme Court suggested setting up a specialized body to examine “irrational gifts” given to voters during elections.

On India’s macroeconomic situation, Goyal, currently Emeritus Professor at the Indira Gandhi Institute for Development Research, said: “Indian growth is holding up despite global shocks and rising rates.

While observing that India has done better than most expectations and compared to many countries under difficult conditions, she said one of the reasons for this was the growing economic diversity which helps to absorb shocks.

“Strong domestic demand can moderate a global slowdown; if industry suffers from the lockdown, agriculture is doing well,” she said, adding that services compensate for less contact-based delivery with digitization, remote work and exports.

According to Goyal, even if global growth slows, China’s diversification, India’s numerical advantage and government efforts to promote exports would support India’s outbound shipments.

Stressing that an increase in India’s currently very low share of global exports remains feasible, Goyal said diversity and reforms in the financial sector have improved its stability.

“The coordinated action of fiscal and monetary policies to reduce inflation while maintaining adequate demand has worked well. The rise in real policy rates has prevented overheating and anchored inflation expectations, as they approach positive values,” she noted.

At its August 3-5 meeting, the Reserve Bank’s MPC decided to raise the policy rate by 50 basis points to 5.40% to curb inflation. This is the third consecutive increase since May.

Asked if high inflation will become the norm in India and if the country’s inflation targeting regime is facing its biggest test right now, Goyal said: “The big test has already passed and it looks like Flexible Inflation Targeting (FIT) is winning.

Pointing out that inflation peaked in April and has been falling since then, she said July was only the sixth month that inflation was slightly above the tolerance range, but that it has reversed and may fall in below 6% before October or a little later.

“Inflation expectations have fallen. The attempt will be to guide them more slowly towards the goal in a soft landing, even if a robust growth recovery sets in,” Goyal said.

Retail inflation was 7.01% in June and decreased to 6.71% in July. RBI has been mandated by the government to ensure that inflation remains at 4% with a 2% margin on either side.

Responding to a question about the weakening Indian rupee, Goyal said the dollar has strengthened against all currencies due to the strong US recovery and rising interest rates. ”

But Indian reserves and intervention in the foreign exchange market have meant that the depreciation of the rupee is only about half of the rise in the dollar and much less compared to other countries,” he said. she said, adding that the intervention aims to smooth out overshoots or undershoots while letting the market determine the exchange rate.

Goyal noted that some nominal depreciation is needed due to the country’s major export competitors and its excess inflation.

“India’s depreciation is about the same as China’s,” she said.

Christy J. Olson