Controlling inflation will lead to interest rate cut: RBI

K C Chakrabarty says focus should be on increasing productivity

If inflation is controlled, it will automatically bring down interest rates, says RBI Deputy Governor K C Chakrabarty. He adds, the major focus should be on increasing productivity and efficiency of manufacturing and agriculture sectors to achieve this.

Speaking on the sidelines of financial conference on systemic risk, organised by Great Lakes Institute of Management, near Chennai, he said the country was facing three challenges — high inflation, current account deficit and fiscal deficit.

“To check food inflation, we don’t need to achieve the productivity level of developed countries, like the US and Australia. If we can replicate Punjab, Haryana and West Uttar Pradesh, it is sufficient”.

Countries like India and China cannot afford to import food. If they go to the global market for procurement of food, the prices will shoot up.

The second factor, manufacturing inflation, needs to be negative and to achieve this, technology should be adopted. “If we can produce same quality goods and services at lower price, which China does, we can achieve this.”

In India, manufacturing as a proportion of gross domestic product is low and investment in manufacturing sector would create employment opportunities.

This would help offset likely losses in employment in the event of foreign direct investment (FDI) in retail.

If FDI in retail comes, it will cut down number of intermediaries who have to be employed in other sectors. If you don’t employee them, the likelihood of demographic dividend will turn out to be demographic disaster.

If we could manage to curtail imports of gold and oil, we can check current account deficit. “Had we not imported $60 billion worth of gold last year, our current account would have been in surplus”.

In the case of fiscal deficit, he said, “Government should target subsidies at poor and ensure that rich are not subsidised”.

About inclusive economy, he said, the banks should reach out to poor and should extend credit facility to those who require it. Today only 10 per cent of the people have access to bank credit, he said. “The poor save and rich borrow, which will raise the systemic risk,” he said.

“We also have strong points, which could work in our country’s favour,” said Chakrabarty. He said, these include the country’s young population, lower per capita income (which offers immense scope for improvement), less complex financial system and lower credit penetration. The strong saving culture of India is also a plus, he said.