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Sacrificing growth to tame inflation: Subbarao to critics

Last Updated: Friday, August 31, 2012 - 09:26

New York: RBI Governor D Subbarao has hit back at critics of his hawkish stance against rate cut saying a little sacrifice in growth is inevitable to tame inflation.

Speaking at the Asia Society here, he parried a question on whether there will be a change in interest rate when RBI reviews its policy on September 17.

Criticism, he said, is often directed towards the central bank that even though it has raised interest rates and runs a tight monetary policy, inflation is still "high and persistent" and growth has been hurt.

"The RBI's response to the criticism is that some sacrifice of growth in inevitable, a necessary price we have to pay to bring down inflation. But that sacrifice of growth is only in the short term," he said during a lecture on 'India in a Globalizing World - Some Policy Dilemmas' last night.

Noting that inflation was down from 11 percent in 2010 to below seven percent in July this year, Subbarao said inflation could have been much higher if RBI had not run a tight policy.

"In the medium term, a low and stable inflation is a necessary precondition for securing India's growth prospects," he said.

Inflation based on the Wholesale Price Index stood at 6.87 percent in July, declining from 7.25 percent in June. It is still however much above RBI?s comfort level of 5-6 percent.

The challenge for the RBI is to ensure inflation is reined in without hurting growth, he said.

"In order to support growth, we need to keep interest rates low but in order to rein in inflation we have to keep interest rates high. The challenge is how do we manage growth-inflation trade off," he said.

The Reserve Bank had cut the bank rate in April by 50 basis points to 8 percent but it left the benchmark interest rates unchanged in its first quarter credit policy review in July despite pressure from the industry, which wants reduction in interest rates to spur growth.

"Inflation hurts the poor the most. We have to listen to the silent voice of the poor. They do not have a mechanism for articulating their demand for bringing down inflation.

"So even as we listen to demand of potential investors for low interest rate regime, we also need to be sensitive to the burden of the poor because of high inflation," he said.

He said the structural food inflation is a "problem of success".

"As India grew, benefits of growth are going to lower income groups," which are eating better.

While oil and commodity prices have softened in the recent months worldwide, India has not had the full benefit of this softening because of the rupee depreciation, he added.

The Prime Minister's Economic Advisory Council had pegged GDP growth for the current financial year at 6.7 percent.

Industrial production recorded a dismal growth of 2.4 percent in May and the overall economic growth slowed to nine-year low of 6.5 percent in 2011-12.

Subbarao said while part of the growth moderation is because of the global slowdown, domestic factors like the tight monetary policy, high interest rate regime, infrastructure bottlenecks, slow clearances of projects, host of governance issues and decline in sentiment of potential.

He said fiscal deficit in India is also high and that is putting pressure on demand and inflation.


First Published: Thursday, August 30, 2012 - 14:43
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