- 5 months ago
In an exclusive conversation with India Today, renowned economist Dr Arvind Panagariya, Chairman, Finance Commission, decodes PM Modi's austerity push amid the West Asia conflict.
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00:00Hello everyone, you're watching NewsTrack with me, Maria Shaquille.
00:03Four days after Prime Minister Narendra Modi sounded the spend-wise, save-more pitch,
00:09the economic signals are now coming into sharper focus.
00:13The wholesale inflation has jumped to 8.3% in April, up from 3.88% in March.
00:21The sharpest spike in over three years, and a clear sign that prices could rise further.
00:27At the same time, the government is tightening the screws on gold imports,
00:32capping duty-free imports at 100 kg per license,
00:36mandating factory inspections and enforcing stricter export obligations on jewelers.
00:42The message is clear.
00:44Reign in non-essential spending, protect reserves and manage inflation risks.
00:50And the ripple effect is already visible on the ground.
00:53The Delhi government rolling out austerity measures from two-day work from home to metro day
00:59and a weekly no-car day.
01:01So from policy push to price pressures, the big question now will be save-more mantra.
01:09Can that really ease the burden on the arm, Admi?
01:13Or is this a signal of tougher times ahead?
01:18What does it actually mean?
01:19To decode this, we have the chairman of the 16th Finance Commission, Arvind Panagria,
01:25who is joining me from New York City.
01:27Professor Panagria, I really appreciate your time.
01:30The WPI inflation has surged to 8.3%, driven largely by fuel amidst global volatility.
01:39Do you see this as a temporary spike,
01:42or the start of a broader inflationary pressure building into the system?
01:48Well, Mariah, we have to wait and see,
01:50because wholesale price index has always shown great volatility.
01:56And the correlation between it and then the consumer price index,
01:59for some reason in India, has been rather weak.
02:03So I would not jump into concluding anything as yet.
02:06Let's wait and see what the consumer price index comes out to be.
02:10I think that is really the relevant index that shows greater stability over time.
02:16I mean, I will not be totally surprised if the inflation does show a bit of upward movement,
02:24because we all know that whenever oil prices internationally have spiked,
02:30they have had a feedback effect on the consumer price index.
02:34But again, you know, I will not expect this spike to be what it is in the wholesale price index,
02:41which is, you know, from going from 3.8 to 8.1.
02:44That's a hell of a spike.
02:46That's not what I expect on consumer price index.
02:49But, sir, it's double the percentage in matter of just one month.
02:56Isn't that unusual?
02:58Well, you have to go back and see, you know, I haven't checked the numbers,
03:02but it also depends very much on the base effect, you know, where the index was a year ago
03:09and where the index was, you know, a year ago the previous months.
03:17So the base effect can itself actually give rise to these spikes.
03:27But for wholesale price index really in India, somehow, this has not been an unusual kind of moment.
03:35We have also seen wholesale price index even go into negative territory and all.
03:39So I would not draw too much conclusion on consumer price index yet.
03:47One needs to look at it more carefully.
03:51Okay.
03:51Before I bring in the big question around gold trading,
03:56alongside the WPI, the government is pushing behavioral changes,
04:01work from home, less travel, and 5% duty on gold and silver findings
04:07and 5.4% on platinum.
04:09This is a mixed of, you know, appeal to the public and also selective duty hikes enough to curb demand.
04:18Is that the case here?
04:20Yeah.
04:21So, you know, I'm perfectly okay with the moral situation that the prime minister has resorted to.
04:29For any leader, that is the first kind of line of defense when he sees some clouds on the horizon.
04:40You know, this goes back, at least in my memory, to the 1965 call by Prime Minister Lal Padu Shastri
04:49to the Indians to observe a fast one day a week when the food shortages were endemic.
05:00So I think that this part is quite okay.
05:02I'm not as okay with the gold kind of hiking up duties and all, because, you know, our concern seems
05:11to be the current account deficit.
05:13And for that, the right instrument really is the exchange rate, let the rupee depreciate, which will make imports a
05:20little more expensive in rupees across the board.
05:24And they will also, the depreciation will also make exports more attractive, exports more profitable.
05:30And so you work on both the fronts and you work across all commodities rather than single out one.
05:37So there, I think, you know, instrument, you know, the objective probably is correct, that one needs to watch out
05:44what is happening to the current account.
05:46But instrument of singling out gold to me seems to be a little kind of blunt.
05:54Okay, but we are looking at gold imports, which are already at a record $72 billion.
06:04And now even components are being taxed.
06:08Will these calibrated duty moves actually reduce imports or risk diversion into informal channels?
06:19Both of those, you know, duty which increases the price of gold will have a tendency to reduce gold imports.
06:30There is no doubt. I think if that were not the case, you will not, you know, hear the gold
06:37importers suffering.
06:41And it will also have the impact of, you know, possibly what you call informal.
06:48But to me, you know, the plain language is that gold smuggling may see a little bit spike as well.
06:54But for all those reasons, you know, I'm not a big advocate of imposing these tariff duties, which inevitably do
07:01lead to these, both of these effects.
07:07Simply because, you know, ultimately it is up to the economic agents, both consumers and manufacturers, as to what the
07:15right volume is.
07:16Because, you know, how does one know $72 billion is the right amount and $73 billion is not or $71
07:22billion is not?
07:23Let the prices be fair to everybody and meaning across different commodities and let the economic agents decide how much
07:34they want to import.
07:36But Professor Panigriya, if we were to look at India's imports, India imports nearly 85% of its oil and
07:44is one of the world's largest gold buyers.
07:47And both these are dollar denominated.
07:52When the Prime Minister asks citizens to cut both, to cut oil, that's why, you know, work from home, you
08:01avoid unnecessary travel.
08:04What is the actual quantifiable calculation here?
08:09Well, you know, that all depends on the effectiveness of the leader, how much the public, the users of these
08:20various commodities are responsive to such calls, patriotism of these citizens.
08:27All that matters, you know, and to the extent that there are many citizens who are motivated by these considerations.
08:35Some effect will happen and remember that, you know, this is just the first step.
08:41And to me, it seems that because, you know, moral situation is completely voluntary ultimately.
08:47You know, it is not forcing anybody to to take the action.
08:52And so I think that's the first that's the first beginning.
08:56Now we have to wait and see, you know, how things unfold, what is the durability of the war in
09:03West Asia and how long the shortage is remain.
09:09But nobody has tried to quantify it because this is not really quantifiable that easily because too much is going
09:17on in the economy when these measures are taken.
09:23And so, but one suspects, one assumes that there is some effect on the margin.
09:31But, you know, ultimately, just to add, after all, you know, this was an instrument that Mahatma Gandhi had employed
09:39very, very effectively during the freedom movement.
09:42You know, he would bring in people precisely by these kinds of calls.
09:48So which is something what Prime Minister Modi is trying also.
09:50Yes, and interestingly, for 70 plus days that the war has been on, the government did not show any signs
10:02of concern.
10:03And then we are seeing repeated appeals.
10:06And then measures being taken.
10:09You know, the convoy of the Prime Minister being halved.
10:12Similar adoption of austerity measures being done by various chief ministers.
10:19And all those visuals have come in as well.
10:22Work from home is something that several companies have started going into.
10:28And then there is this concern with regards to COVID kind lockdown.
10:33You know, these are measures which are developing some kind of concern and a degree of panic as well, Professor
10:39Panagria.
10:40What next?
10:41Is there something more than what meets the eye?
10:44Or is this too little too late?
10:46Well, first of all, Maya, you know, I won't say that the government showed no concern earlier.
10:53The government really went to work.
10:55All those ships that came out of Hormuz for India to the Indian shores, it just didn't happen on its
11:04own.
11:04It was the government taking its measures to make that happen.
11:09So let us acknowledge credit where it belongs.
11:13Now, as to the other fears, you know, when crisis happens, countries have to respond.
11:22Now, COVID happened and dawned upon us completely suddenly.
11:31And it looked very, very fearful event.
11:35And to that, we reacted much faster.
11:37This one, we thought that we could manage.
11:40And the prime minister and his government have tried to manage it.
11:45And now perhaps the government felt that it is time that we take more kind of action.
11:51And it began with moral suasion.
11:54If necessary, I think other actions may come in.
11:57Let me, however, say that my own preference really, Maria, is for price instruments,
12:03not on blunt instruments where you tell one particular industry that you observe work from home
12:10or you tell one particular industry that you reduce your imports.
12:15Allow the price instruments to go to work.
12:18In the U.S. also, I mean, it's not as though the general impression is that U.S. has got
12:24its own supply of oil domestically
12:27and therefore it's all hunky-dory here.
12:29Not the case.
12:30U.S. has allowed the gasoline price to rise, you know, from an average of something like $4 per gallon
12:40pre-war.
12:42The gasoline price in the United States is hitting about $6.
12:46That's about a 50 percent increase in gasoline price compared to that, you know, the government has managed the gasoline
12:55price in India,
12:56petrol price in India quite well.
12:58I would rather that, you know, allow that price to rise and then, you know, automatically we all, I mean,
13:06meaning all Indian citizens,
13:08will cut back responding to the price hike, the inessential transportation, inessential use of energy.
13:16So, I believe in the price instruments, I think, allow it to work through.
13:22Maybe the government fears a little bit of inflationary impact of that and so has chosen other instruments.
13:28But I would rather, because then you work on all margins rather than tell one particular industry to act.
13:36The oil price will apply to everybody and everybody will then get into cutting the inessential transportation and other usage
13:45of energy.
13:46But Professor Panagriya, you know, there are certain negative consequences or should I say unintended consequences.
13:54The fact is that the jewelry industry in particular is the biggest employer as well.
14:00Could there be job losses?
14:02Yes.
14:03So, I agree with that.
14:05This is why I'm saying that, look, you know, do not single out the industry.
14:09You know, the problem of current account deficit is a much wider problem, meaning that, you know, exports being not
14:19enough, imports being too large.
14:21And going to try to solve that through a single industry is going to be less effective and more painful
14:32than going across the board.
14:35So, allow the exchange rate to change, allow the rupee to depreciate, which will make imports more expensive across the
14:42board, make exports more profitable across the board.
14:46And that is the effective way to address, you know, the current account deficit.
14:51No, but while we are looking at the allowing the rupee to depreciate, what is being done?
14:57What are the measures being taken to increase the inflow into India?
15:02Have we taken those measures?
15:05But if you allow rupee to depreciate, inflows would rise because your exports will rise and exports bring in the
15:11foreign exchange.
15:12And your demand for foreign exchange will also decline because the depreciation will make the imports across the board more
15:20expensive.
15:20So, your need for foreign exchange declines, your supply availability of foreign exchange rises and that's how you bridge the
15:28current account deficit.
15:29But, sir, you know, beyond the optics, because we are seeing those measures of convoy being cut, how much real
15:37impact can these steps have on fuel use and forex outflows?
15:44No, no, it's not a matter of targeting one specific commodity.
15:50I am saying that the correct solution is to work on all margins.
15:55So, the right question to ask, Maria, is that how much effect will that have on the current account deficit,
16:04which is the particular variable that ultimately is being targeted even by, you know, trying to reduce fuel imports or
16:14by reducing gold imports.
16:17What I am saying is that the depreciation of the rupee working on the exchange rate will actually work on
16:23all industries, both goods and services, that it is going to discourage imports, it is going to encourage exports, encouragement
16:34to exports will bring in more foreign exchange, discouragement to imports will reduce the demand for foreign exchange, current account
16:41deficit will shrink.
16:42And that is the instrument we have applied, you know, for many years now, since 1991 liberalization, we have relied
16:50on the exchange rate as the instrument to manage our current account deficits very, very effectively indeed.
16:56Because remember that it has been now, you know, for quite many years, the current account deficit has been below
17:022%.
17:03Okay, let me ask my final question now, Professor Panagria.
17:07So, with rising inflation, higher duties and voluntary restraint measures in play, is India then striking the right balance or
17:17does it now need stronger supply side interventions?
17:22So, these are the right kind of, meaning the moral situation, which is all the Prime Minister has done at
17:31this point, you know, effectively no other involuntary step.
17:36This step has been taken yet.
17:38So, we are in the right place for that, but we should not rule out, you know, this is an
17:45external shock, which is worldwide, and different countries will have to deal with it.
17:50India gets hit harder because India is very import dependent for energy, and then that automatically kind of makes India
17:58more vulnerable to the shock.
18:00And if necessary, more step may have to be taken, meaning that, you know, my preferred instrument would be allow
18:06the petrol price to rise a bit, so that we cut the consumption of petrol across the board.
18:13All right, Professor Panagria, always a pleasure speaking to you, sir.
18:17Thank you for decoding the big announcement, and there have been a lot of concerns around it.
18:23Professor Panagria, joining us from New York City, I appreciate your time.
18:28A big piece of breaking news coming in now, and this is, it seems, that the Cabinet reshuffle is on
18:35cards.
18:35Prime Minister Modi will be chairing a meet of the Council of Ministers on May 21st,
18:42after he returns from his important five-nation tour, and the crucial meeting of the Council of Ministers will take
18:51place amidst discussions regarding a potential reshuffle in the Modi 3.0 Cabinet,
18:57according to sources and expansion, and a reshuffle of the Modi Cabinet could take place during the second week of
19:03June, is what we are being told.
19:05So, Hemanshu Mishra is joining us.
19:08So, Hemanshu, this means that the Cabinet reshuffle was finally on the third week of June.
19:17The third week of June is probably going to be in the third week of June.
19:21Everybody is on the third week of June.
19:24And we are going to be in the process that the the 3rd member of the Mardi Command has a
19:30critical mission.
19:32And it is supposed to be in the process that the 9th of June 5th will come to the next
19:42year.
19:42And the second week of June 6th comes to the 2nd year of the 9th or the 20th end.
19:45The point is that the 10th of June 6th will come to the next year.
19:47And the second week of June 6th comes to the current event.
19:49In June, it is possible to change the cabinet and be able to change the cabinet.
19:54In this case, if you can see, the meeting of the Council of Ministers has been kept.
20:00If it is a member of the Council of Ministers,
20:03Mr. Nareesh Modi, the Council of Ministers,
20:08must be aware of this.
20:10If it is a member of the Council of Ministers,
20:17then it will say that the Council will provide a warning of these briefings toлож
20:23such incidents.
20:23One way is that if it is a Council of Ministers,
20:27then immediately you will see the cabinet re-shuffle oil.
20:34Theころ6 cònent of the부분 will be évidemment an outset of thisruptcy takieת for this 7thme press conference.
20:38There will be the first cabinet re-shuffle in 2011.
20:43самом-advent Leben cluster,
20:46And after that, the cabinet reshuffle will be able to see this cabinet reshuffle.
21:15So, we'll watch it.