How do you see the economic situation now?
If we look at the economic impact of the second wave, there are two-three important differences. First, the wave itself was much shorter, the pace of rise was very sharp and similarly the pace of decline was equally sharp and six-to-eight weeks were really intense. In contrast, the first wave lasted for six months. Second, this time the restrictions were all placed at the state level, they were asynchronous in time and they were also heterogeneous in their intensity. Third, most essential activities and inter-state movement were not impacted. Mid-May onwards, many high frequency indicators that we track started trending up again. When you put these and other data together, the overall economic impact of the second wave is not likely to be very large. Finally, our growth estimate of 10.5% for the Budget was conservative compared to, for instance, the IMF’s estimate then of 12.5%. So, with the headroom that it creates, we will not be very much off, compared to our estimates.
Why is that the 1991 reforms are looked at with a tinge of romance while those done later are not seen in the same bracket?
When the reforms were being done in 1991, at that time there was no romance attached with it either. Many people, including people within the Congress party, were making all kinds of noises. Again, 30 years later, when people look back at this period, they will see it with a lot of romance. The parallel I will draw from cricket. The two cricket World Cup victories one in1983 and the other in 2011. The1983 World Cup win was very important because we had no hopes at all. In the 2011 World Cup there were expectations and the team delivered. I look at the reforms in a similar manner — 1991 was like the 1983 World Cup, from a socialist era to free market reforms. But this set of reforms is like the 2011 World Cup win where there has been expectation that we must have a Mahendra Singh Dhoni-like performance and the expectations are likely to be fulfilled. The other point from the cricket parallel is the inspiring leadership, whether it is Kapil Dev or a Dhoni. If you look at the last 30 years,1991 was a crisis, 1998 was the Asian Financial crisis, 2009 was the global financial crisis and now Covid crisis. Look at the policy response and you will understand importance of inspiring leadership. After the Covid crisis, it’s a capex-driven recovery and seminal reforms due to visionary leadership. Contrast it with the response after the global financial crisis.
How do you see the inflation situation?
During the first wave, inflation was above 6% for nine months and that’s because of the supply-side frictions created due to the economic restrictions. The second wave has been much shorter, restrictions have been much lower and that’s why when the May print had come I said that I expect moderation and that it should come within range. The sequential momentum is lower and core inflation is down. As the restrictions have been removed, we should be able to get the inflation numbers within range.
High petrol and diesel prices are a concern and people are blaming the government for the high indirect taxes…
Food inflation (currently) accounts for almost 50% of CPI. The weight of petrol and diesel in CPI basket is less than 3%. We need to recognise that when prices go up, transportation costs go up, which increases cost of production and this may result in cost-push inflation, which are second-round effects. Second-round effects are of similar magnitude to first-round effects, so double that weight and add a little bit and make it 6%. The comparison shows that in the Indian context, food inflation is far more salient.
What about the level of taxes?
Except for the US, where the automobile lobby is very strong, every other country has taxes that are very similar or higher than India. In Italy, France, Germany and the UK, taxes on fuel account for over 60% of the final consumer price. In India, it is 50% for diesel and 57% for petrol. For Spain and Japan, these proportions are similar at 53% and 47% respectively. Our taxes are in no way standing out in comparison to international levels.