Anti-Inflation Measure would hamper growth says RBI Governor

Reserve Bank of India (RBI) governor D. Subbarao has said  that inflation can’t be controlled without sacrificing some growth.
Delivering the Obayya memorial lecture here, he said that a short-term sacrifice of growth was a small price to pay for bringing down inflation so that in the medium term, the growth is secured.

“You cannot control inflation without sacrificing some growth. After all, you have to contain demand. When you contain demand, growth comes down. So there is no way of bringing down inflation without sacrificing some growth,” he said.

The remark came on a day when May inflation rose to 7.55 per cent from 7.23 per cent in the previous month. With growth in factory output slowing down sharply to 0.1 per cent in April, industry has been demanding a cut in key policy rate (repo rate) to bring down cost of borrowings

Subbarao did not believe that India is heading for 1991-like crisis. “It is highly improbable that we will have 1991-type crisis because today we have different set of economy,” he said.

He said while fiscal deficit was as high as it was in 1991 while the current account deficit was going to be higher than that of 1991, the twin deficits would not lead to that situation. He pointed out that rupee was over valued in 1991.

“Today exchange rate is market determined which is a great strength, the country has $285 billion foreign exchange reserves,? he said.

The RBI governor said the while India today has $2 trillion dollar economy, it was only $200 billion in 1991. “Financial markets are resilient, robust and more sophisticated while in 1991, we had no financial markets to speak of.”

He, however, clarified that he was not saying that there were no problems.

“There is nothing inevitable about Indian growth story. It is a great story. It is a credible story. The fundamentals of Indian economy are still strong but at the same time it is not inevitable. There is no god given law that India has to grow at 10 percent or 12 percent. It is the responsibility of not just RBI and the government but it is the responsibility of every one concerned,” he said.

Experts opined that now with inflation shooting up, the central bank would have a tough job in balancing growth and inflation in its monetary policy review on June 18. RBI had cut key lending rate by 50 basis points to 8 per cent after consecutively raising it 13 times since March 2010 in its bid to tame inflation.

Also since January, the RBI has resorted to injecting liquidity into the financial system, by reducing Cash Reserve Ratio for banks. Besides, it has called for fiscal steps by the government to combat inflation. RBI has projected inflation to be around 6.5 per cent by March 2013, with a caution that it would remain sticky and there is a need to arrest the decline in economic growth.