Little growth sacrifice inevitable to rein in prices: Subbarao

As India seeks to control high inflation, Reserve Bank of India (RBI) Governor D Subbarao has said a little sacrifice in growth is “inevitable” amid efforts to bring down prices to acceptable levels.

Subbarao said criticism was often directed towards the central bank that even though it had raised interest rates and ran a tight monetary policy, inflation was still “high and persistent” and growth had been hurt.

RBI’s response to the criticism is that “some sacrifice of growth is inevitable, a necessary price we have to pay to bring down inflation. But that sacrifice of growth is only in the short term. In the medium term, a low and stable inflation is a necessary precondition for securing India’s growth prospects,” Subbarao said during a lecture at Asia Society on ‘India in a Globalising World — Some Policy Dilemmas’, here yesterday.

Inflation based on the Wholesale Price Index stood at 6.87 per cent in July, declining from 7.25 per cent in June. It is still much above RBI’s comfort level of five-six per cent.

Noting that inflation was down from 11 per cent in 2010 to below seven per cent in July, he said inflation could have been much higher if RBI had not run a tight policy. The challenge for RBI is to ensure inflation is reined in without hurting growth. “To support growth, we need to keep interest rates low. But in order to rein in inflation, we have to keep interest rates high. The challenge is how do we manage growth-inflation trade off,” he said.

“Inflation hurts the poor the most. We have to listen to the silent voice of the poor. They do not have a mechanism for articulating their demand for bringing down inflation. So even as we listen to demand of potential investors for low interest rate regime, we also need to be sensitive to the burden of the poor because of high inflation.”

RBI had cut rate in April by 50 basis points to eight per cent but the central bank left the benchmark interest rates unchanged in its first quarter credit policy review in July. Subbarao refused to comment when asked if there will be a change in interest rates when the central bank reviews its policy on September 17.

Subbarao sought to allay concerns that the investment climate in India is losing its attractiveness among foreign investors, saying the country still has an investor friendly environment. He said his recommendation to the government will be to “embark on credible fiscal consolidation, as fiscal deficits are bad since they exacerbate inflationary pressures”.

“India has to run a stable policy regime and have a stable taxation and investment regime,” he said in response to a question on what India should be doing to inspire trust and confidence of investors. “We need to streamline our foreign investment policy and procedures, improve infrastructure, improve our governance,” to make the system more friendly for investors, he added.