More room for rate cut if food inflation comes down: Rajan

Says need to be careful about raising tax rates too high

Chief Economic Advisor Raghuram Rajan today welcomed 25 basis points cut in repo rate by the Reserve Bank of India (RBI) and said there would be more room for lowering the policy rates going forward if inflation comes down.

“It is a good step. Going forward, if inflation stays low and we can bring food prices down, hopefully they will have more room to bring down rates,” he said on the sidelines of Asian Development Bank’s (ADB) 46th Annual Meeting of the Board of Governors.

Elaborating further, Rajan said the scope for a further drop in the Wholesale Price Index (WPI) based inflation was limited as it had already come down. However, food inflation could come down and that might give some relief from Consumer Price Index (CPI) based inflation.

WPI inflation in March stood at a three-year low of 5.96%, compared with 6.84% in February. CPI inflation, on the other hand, eased to 10.39% in March after touching a high of 10.91% in February.

“On the WPI side, some of the pass through that we are doing with energy prices is keeping inflation temporarily high. But this is one-time effect and not a permanent effect,” he said.

The Chief Economic Advisor added demand would pick up as effects of interest rate cuts pass through and large projects are put in place. He also said that there are a number of non-legislative actions that the government could take to reenergise growth and stuck to the government’s forecast of over 6% growth this year. He stressed FDI in retail can give a boost to growth.

During ‘Governors’ Seminar: Beyond Factory Asia’, Rajan said Asiashould think about how to improve jobs in the construction sector along with manufacturing. He said there could be enormous opportunity for Asian companies in the services sector.

Rajan also said India would see major changes in areas such as infrastructure, regulation and skills over the next few years. He, however, added that there was a need to be extremely careful about raising marginal taxes too high, and instead should focus on
broadening the tax base.

Other delegates at the seminar agreed that developing Asia must invest in skills, technologies, and the private sector to move beyond low-cost manufacturing and ensure economic growth remains strong.

“’Factory Asia’ itself is clearly evolving. Huge investments must be made in education and skills training that are appropriate for the needs of the future. For any of this evolution to proceed, the right infrastructure must be in place,” ADB President Takehiko Nakao said.

Slow growth in the US, Europe, and Japan together with a growing Asian middle class means demand is shifting away from developed markets to emerging economies.

Other panellists at the seminar included Japanese Finance Minister Taro Aso; Anne Sipilainen, ADB Governor for Finland; Armida Alisjahbana, the Indonesian State Minister for National Development Planning; and Harvard Business School Professor Tarun Khanna.