Need to peg growth at 8% to tame inflation, says gokarn

Reserve Bank of India (RBI) Deputy Governor Subir Gokarn on Thursday said India's growth rate should be maintained at around eight per cent for a while to tame inflation and spur growth at a later stage.

Delivering a lecture on ‘Inflation and Growth’ at an event organised by Federation of Karnataka Chambers of Commerce & Industry, he said the objective was to ensure maximum growth without provoking inflation.

“Our past experience substantiates this argument. When our growth rate was around seven per cent, inflation was peaking and corrective monetary measures were taken. This eventually led to 8.5 per cent growth at a later stage,” he said, saying it was time the growth rate was kept at eight per cent to contain inflation. Adding: “This may result in somewhat slower growth than is possible at any given time, but it would help achieve sustained high growth.” Supporting the decisions taken by RBI in recent times to raise rates, he said the moves were essential and tailored with the objective of controlling inflation.

Gokarn further said public spending should be curbed to an extent to spur private investment and create capacities and demand, leading to healthier growth and lower inflation. “Low inflation is associated with growth sustainability. Among other channels, it also has a positive impact on investment. High inflation, even with high growth, is not conducive to investment or corporate performance,” he said.

On the virtuous cycle of low inflation, fiscal consolidation, high investment and high growth, he said corporate performance benefits from this cycle and data for the last financial year on corporate performances substantiated this fact. “There is a drop in the margin levels for the first quarter of the ongoing financial year, but I don't see any meltdown. Corporates are managing to pass on the increase in input costs to an extent and recent inflationary pressures are being exacerbated by structural trends in food prices,” he said.

Gokarn's statements come amid food inflation falling to 9.03 per cent for the week ended August 6, even as the price of all items, barring pulses, rose on an annual basis. Food inflation, as measured by the wholesale price index, stood at 9.90 per cent in the previous week.