Focus on boosting infrastructure

MONETARY POLICY 2007-08/ OPINION

Shankar Narayanan,

MD, Carlyle

The RBI governor has tried to manage the twin needs of growth and containing inflation. He seems to have been much bolder than other central banks. He has tried to be cautious without being hawkish which is good from the growth perspective so long as inflation does not get out of hand.

In a country like India where poverty level is high, once inflation gets out of hand, it could be both politically unpopular and much more difficult to contain. Consequently, when central banks have to resort to draconian measures to control inflation, it tends to give a shock to the economy and will restraint growth.

With continued inflow of foreign investments and the RBI's ongoing buying of dollars, liquidity keeps coming in excess. As one gets into a potentially inflationary phase, partly caused by global cues and partly by domestic reasons, exporters could be in a bind because on one hand there is no abatement of wage inflationary pressures, and on the other the strengthening of rupee puts pressure.

In such a scenario, improvement of margins and competitiveness can happen only when supported by productivity gains which can come only from improvement in infrastructure. It will become vital that the infrastructure improvements get addressed both at the monetary and the fiscal policy level.