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In an exclusive interview with India Today, Gita Gopinath, Professor of Economics at Harvard University, discusses the impact of the West Asia conflict and rising oil prices on the Indian economy.
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00:04so as multiple challenges uh stare at the indian economy and the modi government joining me now
00:11is a special guest joined by geeta gopinath former managing director of imf and a professor now at
00:16harvard university appreciate you joining us uh professor gopinath uh you and i were in
00:22conversation exactly a month ago and your concern was if this war goes into uh end may june that's
00:31when its economic consequences will get very serious and that's exactly what seems to be
00:36happening at the moment how do you see the situation now as we enter the end of may with
00:42no clear end to the west asia conflict and indeed what's happening at the strait of hormos and the
00:48blockade there hi rajdeep indeed this global supply shock of oil and also lpg and lng
00:58you know fertilizers all of this is just increasing in scale and while countries have relied on their
01:08reserves to help them during these times and you've seen for example china has really cut back on its
01:13imports of oil but similarly korea and japan have also done so it's becoming a bigger strain for
01:21countries around the world and we certainly see that in india which is being hit also because it
01:26relies a lot on the middle east for its fuel uh and this is very consequential so it's not just
01:33about
01:33the prices but it's about the shortages i actually now worry that this is this is this continues
01:39into june and the estimates are that it's going to take a lot more destruction in demand if prices
01:49have to stay at 110 a barrel that we have right now it's very likely that we're looking just given
01:56the projected path of supply versus demand that we're looking especially in june at closer to
02:02140 a barrel of oil as opposed to where it is now uh so you know every because of this
02:10important
02:11tipping point that's coming that was likely to happen in june i think just everybody just expects
02:15that uh the u.s administration is going to figure out a way to open up the strait but this
02:21is not going
02:22to happen overnight it's going to take two to three months even if today everybody decides that they're
02:27opening up so effectively in this country we've had two fuel price hikes domestic fuel in the last
02:34week alone in five days given that the fears are the worst case scenario that oil goes from 110 a
02:41barrel
02:41to 140 uh a barrel would one presume that india is in for more fuel hikes that this is something
02:48inevitable the government cannot avoid yeah i mean we you know what we have to recognize that is that
02:56this is unfortunately uh an external shock that has hit india that india has little control over
03:04and that is unfortunately creating hardships for houses households for businesses i mean this calls for
03:14an adjustment and so while you can have adjustment through voluntary restraint which is what the prime
03:20minister has called for in multiple forms but it's also going to work have to work through prices
03:25and so yes having fuel prices go up at the pump will be will deliver the behavioral change that you
03:33need in terms of cutting back on use of uh that kind of fuel so it is going to be
03:40difficult
03:41even more difficult if it goes up to 140 dollars a barrel the pain will have to be shared by
03:48the government having a slightly higher fiscal deficit while at the same time some part of the price
03:54increase is passed through to households and companies i mean it's going to be shared in that
03:58in that form we are already seeing inflation creeping up if you look at wholesale and consumer price index
04:04march and april so you expect that to continue as well so we are entering a phase where inflation will
04:10keep creeping up uh growth presumably will slow down uh so the challenges are at a multiple level is
04:17there a priority that you believe the government needs to address at the moment so first and foremost i
04:23think just is just recognizing which i think the prime minister has done by going out and saying that this
04:29is a negative shock out of our control and it requires adjustment it will take a reduction in demand of
04:39these
04:39imported uh goods you know including the other aspects including gold and so on and it will require
04:47lower consumption it is going to slow down activity it is going to negatively affect businesses but again
04:53we should just you know so keep in mind the fact that there are many other things that are going
04:57well in
04:58the indian economy you know the economy came into this place with relatively strong consumption demand
05:04and public spending and infrastructure was also helping so there are positive stories to it india
05:10has about 700 billion dollars in reserves so there are aspects of resilience that come from the you
05:17know what india has in terms of its economic strength in terms of its macroeconomic frameworks but it will
05:23take adjustment and it will take both the government temporarily running higher fiscal deficits so that it can
05:29absorb some of this shock and because it's not going to be able to pass the full cost over
05:34through two households maybe some help for businesses that are in in dire straits especially
05:41small businesses who have liquidity problems you can help them with that again you have to do it in
05:47limited way because we still have the prospect of oil going up to a much higher level i mean that
05:52has
05:52not been ruled out yet so you have to move carefully you have to tread carefully and yes it will
05:58result in
05:59somewhat higher inflation producer price inflation is going to go up even further just given what's
06:06happening with energy prices the important inflation that really does matter is consumer price inflation
06:10that is reflecting also the fact that policy is not allowing prices to rise as much but you know again
06:18because india starts off with a good inflation print before this war has happened it has space for
06:26inflation to move up without having to you know worry about how damaging that could be for inflation
06:32more generally going forward into the future let's come to specifics india's currency has weakened from around
06:3891 rupees per u.s dollar at the end of february 2026 it's almost 97 now the highest ever you've
06:46done an op-ed
06:47where interestingly you seem to suggest that a falling exchange rate can curb imports more effectively than
06:54austerity measures so don't intervene in the forex market india has close to 700 billion dollars in
07:01foreign exchange they will not run out because of higher imports and the current condition therefore
07:06provides sufficient grounds to consider allowing the rupee to adjust without actively depleting
07:12reserves so we could be seeing the rupee crossing the century mark and you're not too worried
07:18i think what we need to pay attention to is what is the adjustment that's required right what
07:24policymakers should care about is what's happening with jobs in the country what's happening with
07:30inflation in the country consumer price inflation in the country with what's happening with output
07:35those are the variables you care about now the exchange rate is one factor that goes into each of
07:42these variables and so you pay attention to the exchange rate because you want to see what's going to
07:46happen to the variables you truly care about right which is jobs and inflation and output so what
07:54happens when the currency depreciates when the currency depreciates it helps you with the adjustment that
07:59you need which is you cut back on imports and that is usually very quick and you see that in
08:05the data
08:05when it comes to exports the quantity of exports don't go up as quickly i mean this is what we
08:12see in
08:12research you don't see you get you don't get a bang for the buck immediately but at the same time
08:16the
08:18profit of exporting firms go up and we've seen that over time you can see an increase in exports and
08:25importantly the price of the exchange rate is not just determined by imports and exports but it's
08:31determined in financial markets so a lot depends upon how foreign investors are looking at their returns
08:38from putting their money in india and so again let's give the exchange rate was to depreciate
08:43there is a natural point where you say well this is now not going to depreciate anymore you come in
08:49capital flows come in and the currency appreciates so you get the adjustment that you need now to the
08:54question of the variables you care about right so let's talk about inflation because that's where you
08:59see directly showing up you want you do want some higher inflation because that's precisely the
09:06mechanism through which you get the adjustment as a central banker what you worry about is if you just
09:11end up with unanchoring inflation expectations and people just assume inflation is going to be
09:17very far from the rbi's target there is nothing in the data right now that points to that that says
09:23that that kind of unanchoring is happening and so therefore that should give some that should give
09:27comfort the other thing you care about is whether this currency movement the rupee getting to 100
09:33is going to generate financial instability there is nothing in terms of financial institutions in
09:38india that point to the fact that okay well if this this will generate financial risks you're not
09:44seeing it any any kind of market pricing so therefore i think this is a moment to say okay we
09:49need the
09:49adjustment this is how the adjustment happens and of course in the event that you actually do have
09:55disruptive financial conditions or you see you're getting close to disruptive financial conditions and there
10:00are data points you can stare at to make sure what that moment is you can use your scarce resources
10:07because you have to keep in mind that the foreign exchange reserves that the rbi has is only that much
10:12700 billion you can't print it you can run out of it and so it's important to be prudent and
10:18cautious
10:19no so is there a red flag on on exchange rates that you would put is there a number you
10:23would put as a red flag
10:25that that's when we should really get worried i would not put a number no that the relevant number
10:30is not the actual value of the exchange rate what matters is looking at you know uh certain kinds of
10:39yields in financial markets the currency bases interest parity rates i mean those are the kinds
10:46of variables you want to stare at to see whether you're seeing what looks like disorderly financial
10:50conditions the problem with intervening right now when this is a fundamental shock which is
10:56you have oil prices going up it is not a problem that india created it is a problem that india
11:02has
11:03to not deal with when you have that kind of a shock and it's a fundamental shock it requires adjustment
11:08if you try to intervene all that happens is you lose your resources reserves and you for for a tiny
11:14amount of time you maybe are able to prop up the currency but then that's just you just lose it
11:19and you're back to where you would have been without the intervention so let me push you one more
11:24time uh you know if geopolitical center tensions continue for three four months will we see the rupee
11:30breach the psychological barrier of hundred dollars it's already the worst performing currency in asia
11:35should that not worry us i ask you this again that's not the priority you're saying am i correct
11:40i think firstly we should not be a psychological barrier there is in a sense with there's no we not
11:48it's not like you want the rupee to be at a particular level for its own sake you want it
11:52to
11:52be where at a level that's consistent with job creation with inflation being well contained
11:58with output being you know business is not under tremendous stress those are that that's what you
12:03care about and there is a trade-off you will have some more inflation but that's again part of the
12:09adjustment mechanism that's required you have to pay attention to problematic situations like financial
12:16conditions being disrupted which of course then will affect jobs and will affect output those are
12:21the things you worry about not not just the the you know the sticker number for what the rupee is
12:27uh and so at the moment it's about adjustment you know there are those who are of course saying uh
12:33gita gopinath that uh the the challenge for the government now is not just to sort of ask people to
12:40be
12:40austere to save more the prime minister says don't buy gold reduce foreign travel reduce fuel consumption
12:48that's those are sermons from the mount what about people particularly at the margins those whose jobs
12:54livelihood stagnant incomes are probably going to take a hit are there solutions out there is there
13:00an example from across the world that you can pick up that maybe india can look at
13:05well there are certainly uh things that can be done and should be done which is including when it comes
13:11to fuel prices as and when the government starts passing through more of the world price into the
13:19prices that retail at retail level you will require to provide more you know cash transfers to
13:26vulnerable households you could even cover some fraction of middle income households frankly so you have
13:31uh uh you know you want to provide cash transfers that's one way you do it there are going to
13:38be small
13:39businesses that are being affected by the higher cost of their inputs these are businesses that you if you
13:45determine that they are these are otherwise viable businesses and it's just about the current shock that
13:51they're facing right now then providing them with liquidity either through you know a you know government
13:58guaranteed loan that's a kind of a measure that you can take to prevent otherwise too many small
14:04businesses from shutting down that's a that's a useful step to take so fiscal deficits will go up
14:09more than was projected before but these are the kinds of adjustments uh that will help you know just a
14:15couple of days ago i had someone who was india's executive director at the imf till not too long ago
14:20dr
14:20surjit balla who said the economic situation couldn't be worse he said foreigners are not investing in india
14:26domestic investors don't want to invest in india he spoke about fi outflows he spoke about declining fdi
14:34he spoke about the in general a climate which was feel bad do you go along with that do you
14:41believe
14:41it's as dire as that for india at the moment or because only six months ago many were speaking about
14:48this being india's goldilocks moment
14:51i do not agree with that i think the indian economy has many areas of strength uh again we
14:59have to keep you know keep make it clear about what are the different forms of shocks there is
15:05what's happening with the west asia conflict it's an external shock not something india created
15:11when it comes to capital flows what we also have to take into account is the fact that because
15:17inflation in the us is now going to be higher for longer interest rates in the us are going to
15:23be
15:23higher for longer which means that from a foreign investor's perspective it is going to be more
15:29attractive to keep money in the us as as opposed to sending it outside what is true about india is
15:35that even before this crisis hit there was a drying up of uh portfolio inflows into india and
15:42not enough foreign direct investment coming into india and there are multiple factors for that
15:47one is india stock markets has always been viewed as being somewhat overpriced there's not those many
15:54assets liquid assets that one can buy that you know you can get high returns on it's ease of doing
16:00business is still complicated there are still you know supreme court rulings regulatory rulings that
16:06happen which seem to throw on bring up uncertainty about the rules of the game in india and
16:12so companies and investors are cautious about coming in because of that so what this is these are all
16:20areas that require fixing and i think it's important to do to address all of these issues that's where
16:25also the focus should be you know kept alongside of course helping households and uh businesses with
16:33this current conflict in conclusion the prime minister seemed to suggest in his uh when he spoke at a
16:38gathering that covid like we could be in a covid like situation of course the covid years uh saw uh
16:45demand fall as well as of course supply side shocks as well do you believe it's fair to liken what
16:51what
16:51could be happening in the next few months if this conflict continues to a covid like situation or would
16:56that be an exaggerated fear you know if this conflict continues and we're looking at oil at now at 140
17:05a barrel and expected to stay there for the foreseeable future it's a problem not not just for india frankly
17:11it's a problem for the world and we're looking at global growth going to two and a half percent or
17:16even
17:16two percent so that is a very large major shock for the world economy you know the basic points that
17:24when
17:24you're faced with the shock of this kind it's not possible for the government to come in and just
17:29you know smooth it over and say that we we can fix the problems for you i think that's a
17:35fair statement
17:36it requires some adjustment it requires adjustment i again i think that the indian economy has come into
17:43this in with enough strength that this is not definitely not a moment to panic this is a moment
17:49where you know as the prime minister says it requires adjustment voluntary restraint but i also think
17:55importantly through the signals that's provided through the rupee and through prices at the pump
18:01i'm going to leave it there uh geeta gopinat obviously as i said we spoke last month and with
18:06every month the situation uh gets uh more and more difficult to manage and of course if this crisis
18:12continues through the summer then it throws up many more issues some of which we'll of course come back
18:18to you to discuss but i appreciate you taking the time off and talking to us here thank you very
18:23much
18:24thank you very much
18:25you
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