India’s biggest worry at the moment should be the MSME sector, warns top economist Pronab Sen
Amid all the headwinds the Indian economy is suffering from, Sen, who was the former chief statistician of India, is of the opinion that MSMEs could face an acute shortage of capital as inflation spirals up.
- Jun 20, 2022,
- Updated Jun 20, 2022 12:01 PM IST
To put things straight, Indian economy at the moment isn’t doing well, and is battling crises from multiple fronts. On one hand, is the big issue of inflation, with the Reserve Bank of India (RBI) geared up to tackle it by increasing interest rates, and thereby stem demand. But globally as well, especially on the back of worrying inflation numbers in the US, there are signs of unease that the American economy could head into a recession, infecting the whole world in the process.
However, amid all these headwinds, Pronab Sen, former chief statistician of India, is of the opinion that for India, its biggest worry should be the MSME sector, which is still reeling under “stress.”
“My big worry is that capital markets are going for correction very quickly, when capital market starts correcting then what will end up happening is that the corporate India, which is the only part of the economy having access in capital markets, they no longer will have cheap money available. They will probably be forced to fall back on the banks, when they do that, because of the cost of borrowing goes up they could scale back their expansion plan. So, the investment should start coming down,” the top economist explained.
According to Sen, when corporate India goes back to the banking sector, the growth in the banks lending to the MSMEs, something which has just started to pick up, will get affected, which in turn, will impact the MSME’s growth adversely.
Throwing light on inflation, Sen said, “I think RBI has already given us an indication of that, I tend to agree with it. Inflation is going to go up in this quarter and the next quarter and then gradually it will start coming down. And how quickly it will come down will determine the inflation for the year.”
According to Sen, the rupee should be allowed to depreciate but volatility needs to be curbed because volatility creates uncertainty.
“Uncertainty is bad for any economic system then people who are taking decision about consumption and everything they don’t know what the correct decision is. That uncertainty will hugely damage. So RBI should not focus on managing value of rupee but should focus on managing volatility,” Sen added.
Sen also added that if you are going to have monetary tightening happening, you should expect capex to fall, if it does not then monetary policy is not having any impact.
Also read: India Inc. endorses GST, urges early action on key challenges: Deloitte survey
To put things straight, Indian economy at the moment isn’t doing well, and is battling crises from multiple fronts. On one hand, is the big issue of inflation, with the Reserve Bank of India (RBI) geared up to tackle it by increasing interest rates, and thereby stem demand. But globally as well, especially on the back of worrying inflation numbers in the US, there are signs of unease that the American economy could head into a recession, infecting the whole world in the process.
However, amid all these headwinds, Pronab Sen, former chief statistician of India, is of the opinion that for India, its biggest worry should be the MSME sector, which is still reeling under “stress.”
“My big worry is that capital markets are going for correction very quickly, when capital market starts correcting then what will end up happening is that the corporate India, which is the only part of the economy having access in capital markets, they no longer will have cheap money available. They will probably be forced to fall back on the banks, when they do that, because of the cost of borrowing goes up they could scale back their expansion plan. So, the investment should start coming down,” the top economist explained.
According to Sen, when corporate India goes back to the banking sector, the growth in the banks lending to the MSMEs, something which has just started to pick up, will get affected, which in turn, will impact the MSME’s growth adversely.
Throwing light on inflation, Sen said, “I think RBI has already given us an indication of that, I tend to agree with it. Inflation is going to go up in this quarter and the next quarter and then gradually it will start coming down. And how quickly it will come down will determine the inflation for the year.”
According to Sen, the rupee should be allowed to depreciate but volatility needs to be curbed because volatility creates uncertainty.
“Uncertainty is bad for any economic system then people who are taking decision about consumption and everything they don’t know what the correct decision is. That uncertainty will hugely damage. So RBI should not focus on managing value of rupee but should focus on managing volatility,” Sen added.
Sen also added that if you are going to have monetary tightening happening, you should expect capex to fall, if it does not then monetary policy is not having any impact.
Also read: India Inc. endorses GST, urges early action on key challenges: Deloitte survey