Internal debt is worrying: Arvind Virmani

While the Indian economy is in the doldrums and seemingly without a direction, there is a bigger worry for many an expert.

“The internal debt should be the biggest worry,” said Arvind Virmani, India's representative to the International Monetary Fund. Virmani had earlier been the chief economic advisor to the Centre.

“If there's one default, it will set off a chain reaction and would do a lot of damage to the economy,” Virmani added. He was at the Indian Institute of Management, Bangalore, to give a talk to participants of the first-ever programme on monetary policy being held in India. He spoke to them on capital flows.

The programme aims to explain how the Reserve Bank of India, as a regulator and supervisor of the banking system, operates its monetary policy instruments through the banking system.

In Q2, the Gross Domestic Product (GDP) growth, said Virmani, might not be that high. “But, we will know about how it performed only later. By the time we know how we have done in one quarter, the whole of the next quarter is over.”

According to Virmani, there have been only 16 countries in history whose per capita income growth has averaged 7.5 per cent for a decade or more.

Of these, only four countries were able to sustain 7.5 per cent average growth for two decades and only two (Japan and China) for three decades. Thus, the macroeconomic challenge in generating GDP growth of 9 per cent or more or equivalently per capita GDP growth of 7.5 per cent or more, might be quite different from those seen earlier during the period of relatively moderate growth rates.

There are two inter-related macroeconomic challenges we face in maintaining high growth on a sustained basis, he said. These relate to capital inflows and inflation. “We might have had high growth in one decade. But, evidence has shown that there's no correlation between growth in one decade and another,” he said.

Expectations on the agriculture side are good and could give some boost to growth. The exchange rate has gone up by 15 per cent recently, so the impact would be less. But on the global side, that is an issue.

“We are not 100 per cent certain that Q3 would be better,” Virmani told Business Standard. “If we have had a high growth rate over a decade or so, there's complacency. Sustaining growth is a problem.”

There is also the issue of how external balances play out as factors such as high imports, strong oil prices and the depreciation of the value of the Rupee remain.

"In the last three years, the goods and services deficit has grown. Till March 31, the effective exchange rate has appreciated, making India less competitive. Inflation has been high in India while it has declined in the US," he said.

Virmani estimates the value of the Rupee in the range of Rs 63-65 versus the dollar, given the country's economic fundamentals.