Prime Minister Manmohan Singh says he refuses to believe those who claim that stagflation has hit the Indian economy.
"There is no stagflation. There is a slowing (of economic growth)," he told reporters last night, while returning from the G20 meetings in Mexico and the Earth Summit in Brazil.
Stagflation is a situation in which the inflation rate is high, the economic growth rate slows and unemployment remains steadily high.
It raises a dilemma for economic policy since actions designed to lower inflation might choke growth further.
India's economic growth declined to a nine-year low of 6.5 per cent in 2011-12, while food inflation in May remained in double-digits for the third month in a row in May.
On the Reserve Bank’s move to retain policy rates and the banks’ cash reserve ratio, the prime minister said: "Monetary policy is the preserve of the central bank. The Reserve Bank enjoys autonomy. There are always consultations between the government and the Bank. But, we respect the autonomy."
Before the Reserve Bank of India review, Moody's Analytics had said the central bank could not be too aggressive in cutting interest rates, since the economy faced stagflation.
Commerce & Industry Minister Anand Sharma had expressed disappointment over RBI's move. “Whatever reason they have based it on, it is disappointing, and will not help in reversing the trend when it comes to core sector manufacturing. I shall definitely be writing to both the finance minister and the RBI governor on the issue and seek a review of the status quo,” he had said.
On RBI having said last week that interest rates might not be the principal factor impacting growth at this juncture, the PM gave a generalised reply.
"Whatever RBI says, it requires urgent attention on the part of all concerned," he said.
In its policy review, the Reserve Bank of India had said the estimates suggest real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08.
This suggests that factors other than interest rates are contributing more significantly to the growth slowdown.
The Reserve Bank had also said the widening current account deficit, despite the slowing in growth, was symptomatic of demand-supply imbalances and a pointer to the urgent need to resolve supply bottlenecks.