‘If you look around the world, it’s hard to find reforms on the scale of India’
MUMBAI: Maurice Obstfeld is one of the many macroeconomists trained by the legendary Rudi Dornbusch who have gone on to make a mark in international policy. His two textbooks with Paul Krugman (on international economics) and Kenneth Rogoff (on international macroeconomics ) are standard reading material for students. Now chief economist of the International Monetary Fund (IMF), Obstfeld spoke to Mint about the global economy, India and the problem of international monetary coordination. Edited excerpts:
The world economy is in the midst of a synchronised recovery. Is it sustainable?
Things are indeed going very well. We increased our forecasts for global growth in 2017 and 2018 by 0.1 percentage point each in September. Global trade is growing rapidly. Investment has risen, and remember that investment is trade-intensive.
We view this as a cyclical upswing, with output gaps closing. The longer term potential growth numbers are much the same. That is why the IMF has been telling governments to undertake structural reforms before the next slowdown. Fiscal buffers are depleted and monetary policy space is limited.
One result of the global economic recovery is that the US has begun to tighten monetary policy. Will this disrupt global capital flows? And what are the risks for India if that happens?
There are a number of global concerns about the transition to higher interest rates in the US. I believe the transition will be a gentle one. India is in a relatively good place. Foreign exchange reserves are at a record high. The current account deficit is not negligible, but it is supported by FDI inflows. Structural reforms are happening. So India is not a vulnerable country.
What do you think of the recent economic reforms in India?
There have been impressive reforms. If you look around the world, it is hard to find reforms on this scale. The asset quality review by the RBI, the recapitalisation of banks, the improvement in the ease of doing business rankings of the World Bank, the insolvency and bankruptcy code (IBC), the goods and services tax (GST) are all important. However, we still have to see how some of them work in practice. The proof of the pudding is in the eating. For example, there is still scope for simplifying the GST structure to make it more effective. The governance structure of public sector banks also needs attention.
The Indian central bank has been criticised for allowing the rupee to be overvalued in real terms, leading to a loss of export competitiveness. What do you think about this issue?
People often tend to forget that domestic inflation is also an important determinant of export competitiveness. They also ignore other factors of REER (real effective exchange rate) appreciation such as a high fiscal deficit. Foreign exchange intervention is useful when there are disorderly conditions in the market, but we must be careful about trying to maintain the exchange rate at a particular level.