‘Monetary pause justified if real interest rate is within 0-1%’

Signing more Free Trade Agreements, including with US, Europe and UK, will help India become an attractive destination for manufacturing supply chain, Niti Aayog member and economist Arvind Virmani said. The Monetary Policy Committee of the RBI should continue with the pause in policy rate, if the real interest rate is within 0-1%, Virmani told Prasanta Sahu. As per data released later in the day, the CPI inflation rate for April came in at 4.7%, against the repo rate of 6.5%. Edited excerpts.

How can India boost merchandise exports?

I consider the slowdown in merchandise exports to be temporary. I think much of it is part of an inventory cycle. The whole export ecosystem, the supply chains all over the world, were disrupted wherever they could accumulate more inventory if they did it as a precautionary motive. For example, when the Chinese supply chain was disrupted, some gave orders to India. That’s how many of our engineering goods exports grew very fast a year ago. There are, of course, standard consumer goods like gems and jewellery and those sorts of consumer goods will be affected by the slowdown. That will also depend on how deep or long the recession in the developed countries is.

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What can India offer to make MNCs shift manufacturing from China here?

US and Europe are diversifying supply chains from China as they cannot afford to be stuck with one country. In four sectors — electronics, telecom, textile, and garment — China has between 30% and 50% of the market. This has never happened before, and is highly risky for any buyer. So, over time, supply chain will spread and the shift will increase. We are doing two things to attract MNCs to India. One, of course, is entering into more Free Trade Agreements (FTAs). Certain countries like Vietnam, for example, already have an FTA with European Union. So, they will tend to get more labour-intensive export shifts to their country, compared to us. So clearly, signing FTAs will give us a more level playing field. India’s FTA talks are in the process with UK and EU.

Because of their domestic political compulsions, the US does not want to sign any new FTAs. So, the import-export system has to become more seamless in terms of tax and customs bureaucracy in terms of simplification of data. So, some of these will be required if we want to get more of the US MNCs to shift to India rather than some other country.

Is it time for the Monetary Policy Committee to end the rate hike cycle?

The MPC has already paused and they were ahead of the curve. After MPC did it, there has been discussion in the US and other places. They are talking about a pause after one or two policy rate increases. We were sensible. The real interest rate (repo rate minus inflation rate) in India was negative for a long time. So, the MPC kept raising the policy rate so that the real rate is between zero and 1%. I’m not sure whether the MPC will go for zero or 1% (for real interest rate), but within that range, I’m comfortable. If it is still in that range, I think MPC should continue with the pause. If prices rise again, then of course they will have to reconsider.

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Where do you see India’s economic growth in FY24?

India probably has the highest oil import ratio in the world. So, it has a much more fundamental effect on the economy. So given that, if oil prices remain low or go down further, I think there is an upside potential. Historical analysis shows that whenever exports go down, oil prices also go down. It doesn’t affect us that much because of this offsetting effect. I stick with 6.5+/-0.5% growth rate for FY24.