Duvvuri Subbarao: India to see ‘K-shaped’ recovery as demand hit, says ex-RBI head Duvvuri Subbarao


The Indian economy’s recovery is likely to be ‘K-shaped’ instead of a ‘V,’ as rising inequality is poised to hit consumption and growth prospects, according to the country’s former central bank Governor Duvvuri Subbarao.

“An important consequence of the pandemic has been the sharpening of inequalities,” he said in an interview Friday. “Growing inequalities are not just a moral issue. They can erode consumption and hurt our long-term growth prospects.”

India’s gross domestic product is forecast to grow by as much as 12.5% in the current fiscal year ending March, which will make the economy the world’s fastest growing major one. While that prediction followed a string of fiscal and monetary support, which stoked economic activity after pandemic curbs were eased, a new surge in Covid-19 cases have raised fears of renewed restrictions crippling an economy reliant on domestic consumption.


This time around, policy makers will have limited options, said Subbarao, who helmed the Reserve Bank of India for five years from September 2008 during the global financial crisis. While worries about ballooning public debt would restrict fiscal support, concerns about inflation would keep the central bank from cutting interest rates, he said.

These limitations could contribute to making the economy’s recovery a long drawn one, with ‘K’ representing an uneven rebound compared to a V-shaped one, which as the letter suggests a quick return to growth.

Rising inequalities were “particularly painful” to a low-income country like India, where the upper segments of the population have seen their incomes protected and their wealth rise while the lower sections have lost jobs, incomes, savings and purchasing power, Subbarao said.

About 122 million people — mostly daily wage earners and those employed by small businesses — lost their jobs to one of the world’s strictest lockdowns around this time last year, and new localized lockdowns by Indian states now are once again pushing the unemployment rate higher

Subbarao, who holds a masters in economics from Ohio State University and was a Humphrey Fellow at the Massachusetts Institute of Technology, said despite the double-digit growth forecasts from the likes of the International Monetary Fund and the RBI, the Indian economy would be worse off than it was before the pandemic.

Here are some more key points from the interview:

  • On RBI’s pledge to buy as much as 1 trillion rupees (about $14 billion) of sovereign notes through the G-Sec Acquisition Program this quarter, Subbarao said: “From supporting growth, to ensuring price stability, to financial stability, to yield curve management and lastly protecting savers in India who are grappling with negative real rates on their deposits, the RBI needs a separate instrument for each objective. The G-SAP can be interpreted as an instrument for yield curve management”
  • He said privatization of state-run banks was a “right decision.” Instead of using scarce budgetary resources to recapitalize government-controlled lenders, it’s better to use that money where it will be more productive, he said
  • Subbarao said that while its good to build foreign exchange reserves, the RBI should take care that the costs don’t outrun the benefits

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