The Hindu Business Line : ‘Problems facing Indian economy are short term’

Chennai, Aug 8 Dr Arvind Virmani, Chief Economic Adviser to the Ministry of Finance, on Thursday said that the problems that the economy is facing are cyclical and therefore short term. The medium and long term prospects of the Indian economy are very good, he said.

“Don’t confuse cyclical trends with medium term growth,” Dr Virmani said in his address to the Madras Chamber of Commerce and Industry on ‘Growth trends and Global cost inflation’.

Basing his arguments on detailed statistics, he said that on the one hand investments productive capacities are going up, thanks (at least partly) to the buoyant savings rate, which stood at a record 36 per cent in 2007-08. On the other, the incremental capital needed to produce one unit of output (measured in terms of the incremental capital output ratio) has been coming down, indicating efficiency in the use of capital.

The high rate of savings alone is enough to give a growth of 9 per cent, he said.

Inflation

Dr Virmani, who has over a quarter century of experience in working with the government of India, said that he was not speaking in defence of the Government, but only on the basis of pure economic thinking.

He also noted that if inflation in India appeared to be higher than in other countries, it was because of the different methods of calculating inflation. The Indian wholesale price index captures a whole lot of cost inputs, unlike the US Producer Price Index, which takes into account only the factory-gate prices.

He noted that inflation in India was because of global cost push in mainly three areas — oil, minerals (such as iron ore) and edible oil. The main reason for commodity prices going globally according to Dr Virmani is the demand-supply imbalance; speculation is only a small contribution.