Interview with Professor Ashima Goyal

Prof. Ashima Goyal is an eminent economist and member of the RBI’s Monetary Policy Committee. She was a visiting fellow at the Economic Growth Centre, Yale University and a Fulbright Senior Research Fellow at Claremont Graduate University. She is currently a professor at the Indira Gandhi Institute of Development Research in Mumbai.

1. You wrote your first book, 'Developing Economy Macroeconomics: Fresh Perspectives' in the year 1999, about 21 years ago! Since then, a lot of changes have taken place across the world. How would you compare them, if you could comment upon the same?

Prof Ashima: This is an interesting and unusual question. Indeed a lot of changes have occurred. Many of the earlier developing economies are much more open and have become emerging markets (EMs). Their share in global income exceeds that of advanced economies (59.65% in 2019). Their growth is now a driver of world growth. But old ways of seeing have not changed. Not enough was done to protect EM growth, which became volatile after the global financial crisis. Quantitative easing in advanced economies added to the volatility EMs faced making it difficult for them to sustain growth.

Keeping domestic demand one step ahead of supply remains as important today for higher growth as it was when I wrote my book (See Goyal, 2020,

2. With the formation of the second Monetary Policy Committee, will there be a change in the way policies are formulated?

Prof Ashima: The process is well set now and will continue. But since this MPC is starting work at a time of an unprecedented pandemic and has to deal with its after-effects there may be relatively more focus on unconventional policies. This is only my personal opinion and not that of the MPC itself.

3. How can we strike the right balance between monetary and fiscal policies? In the past there have been talks about how fiscal policy tends to dominate and influence the way monetary policy operates. What are your views on this?

Prof Ashima: I have written some research papers as well as a recent op-ed on this ( Preferences of both sets of policymakers tend to come closer in crisis times and coordination does well. In my view in normal Indian conditions, flexible rules combined with delegation to a pro-growth central banker and a conservative finance minister works well.

4. We are all aware of the infamous Trilemma or the “Impossible Trinity” of choosing between free capital mobility, exchange-rate management, and monetary autonomy. During the COVID-19 pandemic, this choice has become more difficult with soaring inflation. What, according to you, can be done to tackle this issue, and what is the best option for India at this point?

Prof Ashima: Lockdown related disruptions of supply shocks are responsible for the current rise in inflation, which should reverse as lockdowns ease. CPI inflation exceeding WPI for the same items points to bottlenecks in retail supply. Over the longer term, structural food surpluses, agricultural reforms, and global changes in oil demand and supply can be expected to keep commodity prices soft. Reform is also working towards reducing the costs of doing business in India, even as the inflation targeting regime anchors inflation expectations better. Therefore, inflation can be expected to moderate.

Handling the impossible trinity requires the use of countercyclical macro-prudential policy as well as market-based capital flow management techniques. Exchange rate flexibility alone is inadequate. This is well recognized internationally now.

5. Seeing the current situation of India's economy amidst the pandemic, in which sectors should India invest to get the best returns, and how do you perceive India’s position post-COVID?

Prof Ashima: Private investment is low and waiting for a definitive recovery in demand. But tech and pharma companies that have gained should be seeing investment. There is a jump in household demand for white goods. Firms that invest today will see large future returns. Banks and financial institutions are finding it easy to raise equity. The government should push infrastructure investment that has the largest multipliers. Road building and low-cost housing also has higher employment elasticity.

6. What steps do policy measures do you think the government should undertake to stimulate domestic demand so that India’s growth can recover and sustain as the effects of Covid-19 wear off?

Prof Ashima: Fiscal deficits have risen countercyclically as tax revenues fell with the lockdowns. Even so, there is scope for further prudent expansion of government spending, especially in infrastructure, to boost demand and trigger private investment to raise growth. The expenditure should ideally be designed to relieve supply-side constraints as well as protect low-income families that have suffered the most. Examples are an urban version of MGNREGA with wages capped at rural wages and used to provide labor supply for municipal work. An employment subsidy to MSMEs registered on GST so they are viable firms. The ex-post fiscal deficit ratio falls as growth raises the denominator and rising tax revenues reduce the numerator.

7. In the aftermath of COVID-19, do you think it has brought any kind of a positive impact to the Indian economy?

Prof Ashima: There are many longer-term positive impacts. Business costs have come down and some amount of work from home will remain, lowering congestion. A big jump in digital payments will improve tax compliance. An impetus is given to digital and pharma sectors where India already has a comparative advantage. Diversification of global supply chains will help India attract more manufacturing industries. The power of industry-government working together is demonstrated in the way India went from zero to self-sufficiency to exports of PPE suits in record time. Primary health facilities will improve. Better records will be kept of migrant labor and they will obtain better living conditions. India went through a decade of tight financial conditions. Liquidity is once more coursing through the economy helping the revival, while the policy is watchful to avoid over-stimulus that can create future risks.

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