Price stability necessary for long-term growth: Subbarao

Reserve Bank Governor D Subbarao has said price stability was necessary for ensuring sustainable growth in the long term as it helps investors and consumers to take informed decisions.

“There might be some trade-off in the short term but in the medium to long term, you need price stability for investors and consumers to make informed choices, a necessary condition to stimulate growth”, he said in an interview to a weekly magazine in Mauritius.

Referring to the economic challenges faced by India, he said, “the growth (in 2012-13) was going to be the lowest in a decade. Inflation has come off the peak but is still quite elevated. We are going to have historically the highest current account deficit this year. And investment has decelerated. So there are challenges.”

However, he added, India’s growth story was robust and its growth drivers are all intact. “If we do the right things from now on, we can make the promises come true”.

On whether inflation was a bigger problem than growth, RBI chief said, “I wouldn’t say bigger or smaller. You need growth — rapid growth — and you need an environment of price stability.

“I would say the price stability is a necessary condition for growth. It would be futile to believe that you can have growth in a time of rapid inflation.”

As regards the effectiveness of the monetary policy to deal with the current economic woes, he said, it was only one variable and concerted action is needed to stimulate growth.

Fiscal deficit, he said, “is very important for monetary policy to be effective and contain inflation. It is important for the savings rate to go up, it is important for the government’s quality of expenditure to improve so the biggest thing to do for fiscal consolidation in India is to reduce the subsidies.”

Replying questions on conflict between RBI and the finance ministry, Subbarao said, “I wouldn’t call it a conflict, but there are definitely differences of opinion and differences that we talked about earlier are quite natural depending on where you are coming from. I also want to say that I have excellent liaisons with our finance minister...We have a good mechanism of managing those differences.”

On the revision of the India-Mauritius Double Taxation Avoidance Agreement (DTAA), Subbarao said there was a need to prevent round-tripping. “What I have understood is that it is up for some renegotiations to prevent and minimise abuses. There is round-tripping and there is a need to prevent that,” he added.