High inflation posing risks to growth: Subbarao

Reserve Bank of India (RBI) Governor D Subbarao on Friday said the current high level of inflation was posing significant risks to future growth and it was imperative to bring it down even if that meant sacrificing some growth in the short term.

In a presentation to the Inter Ministerial Group (IMG) on inflation, Subbarao said the monetary policy measures, announced in the bank’s Annual Statement for 2011-12, were based on the premise that bringing inflation down, even at the cost of some growth in the short term, should take precedence.

The RBI, in its credit policy statement on May 3, reduced growth estimates to eight per cent, as it increased the policy rates for the ninth time in over a year. It decided to go for a sharper-than-expected 50 basis points rise in the policy rates to rein in inflation. “We said everything we needed to say in the policy document. The RBI’s understanding of short-term and long-term inflation situation was explained to the IMG,” Subbarao told reporters after emerging from the third meeting of the IMG that lasted about two hours.

He explained that experience in India as well as globally suggested that in the long run, there was no trade-off between growth and inflation. He said any attempt to push growth above the potential level would only lead to higher inflation, but no durable growth or employment gain. He, however, emphasised that containing inflation was imperative to sustain growth over the medium term.

“This is a critical attribute of a favourable investment climate, on which growth sustainability depends. Fiscal consolidation will also contribute to improving the investment climate,” he said.

Chief Economic Advisor Kaushik Basu, who heads the IMG, agreed there was no conflict between the objectives of high growth and low inflation in the long run. In the short run, lowering inflation can have a dampening effect on growth, as the traditional Philips curve analysis suggests. But this is desirable, according to him, if the aim is to achieve high, sustainable growth.

Basu said all emerging economies were troubled by the resurgence of inflationary pressures and there was a concern that the very nature of global inflation might be changing.

The Wholesale Price Index-based inflation for March was 8.98 per cent. Although food inflation came down to 8.53 per cent for the week ending April 23, from 20 per cent in February last year, actual prices of food items continue to remain high.

The IMG was set up at the suggestion of Prime Minister Manmohan Singh in February ‘to review inflation situation and suggest corrective measures’. The meeting was also attended by secretaries from finance, commerce, Planning Commission, food and agriculture ministries, who are part of the IMG.