With eyes set on the Reserve Bank of India’s policy statement on Friday, World Bank’s chief economist for the South Asia region, Kalpana Kochhar, says taming inflation is a bigger challenge in India than boosting growth. In an interview with Indivjal Dhasmana & Dilasha Seth, she shares some views on the subject. Edited interview:
Our chief economic advisor, Kaushik Basu, had suggested the RBI think out of the box, citing the example of Turkey, which reduced interest rates despite high inflation and succeeded in boosting growth and curtailing inflation. Do you agree?
Turkey has been experiencing major capital inflows. Capital inflows are responding to high interest rates and this is complicating their macro-economic management. Credit growth has been very high. One of the ways to discourage capital inflows is to lower interest rates. This is not the situation in India. India is not experiencing very huge capital inflows. And, even when it does, these flows are not sensitive to interest rates. The Indian debt market is not very open to foreign capital flows. Most of the inflows come through the stock market. Also, credit growth is not terribly high in India. It is in the 20 per cent range. Therefore, the parallels between Turkey and India are not obvious to me.
Inflation in India shot up to 9.78 per cent in August. There is a debate whether RBI should continue with its policy of raising rates or not, since its monetary squeeze is hurting growth. What is your take?
Inflation is awfully close to 10 per cent, double digits. The main concern is that it has persisted at that level for a long time. The RBI would have to take that persistence into account, suggesting that it is still a problem and vigilance is still required on inflation.
We also have some information that industrial production is moderating, although it is one month of data (July) and a volatile series. It is difficult to make too much of a story out of that. But, added to that you have global uncertainty, and you have commodity prices that could potentially start coming down.
So, overall, the situation is a lot more complicated now than just the domestic balancing act, which was already difficult. Global uncertainty adds an additional dimensional difficulty.
What is the bigger challenge in India — to boost growth or tame inflation at this point?
I’d say taming inflation is a bigger challenge. On growth, India has demonstrated remarkable resilience in the past. Even at the bottom of the global financial crisis, when the world was recording very low growth, India grew at a reasonable rate. On growth, there appears to be an underlying dynamism in the economy. On the other hand, inflation is a bigger problem. India is chronically supply-constrained. Also, inflation is a bigger problem for the poor.
Some economists say monetary policies are not working because of the loose fiscal policies in India. In the first quarter of 2011-12, the fiscal deficit has already touched 7.8 per cent of GDP. Do you agree?
The policy mix is not fully consistent. Programmes such as the MGNREGA (the rural jobs guarantee) are an important part of the government’s inclusive agenda and it puts more money in the hands of rural consumers. The efficiency in the delivery of these schemes, however, needs to be strengthened. The subsidy bill is also growing and leakages add to the fiscal pressures. So, while monetary policy is trying to curb demand pressure, you have fiscal policy creating demand in the economy.