The Hindu Business Line : Modest inflation no cause for worry

If there is a single factor, which has deterred the RBI from cutting interest rates, it is the stubborn behaviour of the price index in the last one year. The central bank thought it would drop to the 4-4.5 per cent range by fiscal year end, but that has not happened (although the last data for the year is still due this Friday).

By our historical standards, the present inflation level is not unduly high. We have seen rates in the teens in the early eighties. But that was the pre-liberalisation era. Not that a mere switch to a more market-oriented economy did the trick.

On the fiscal front, the Government's indiscipline touched new heights. Yet the 1990s saw Indian inflation decline to levels not seen in decades. It was possible because the global economy itself moved to an extremely low inflation plateau.

Now our prices are rising much faster than in G-7 countries. The US inflation is barely 2 per cent and Europe's is also below 2 per cent. Japan, of course, is in the deflation zone. The First World is approaching near zero movement in prices. But India, unfortunately, is not in the same boat.

Our growth rate has stepped up to the 8 per cent range. Given reasonably good monsoons, it does not look difficult for the economy to move to a sustainable high growth trajectory. As a developing country seemingly in the takeoff mode, its natural rate of inflation is bound to be higher than those of affluent economies. Thus, higher inflation, per se, compared to the US, is not something to be unduly concerned about. Indeed, if inflation is very low, the economy is probably in or tethering on the edge of recession. No policymaker or central banker is likely to contend that that is a satisfactory state of affairs.

In the Indian context, modest, even moderate, inflation will boost corporate profits and encourage new business investments. Surely, if an impeccable inflation record can be achieved only at significant cost to growth and employment, the choice is clear.

The ECB's tight monetary policies are widely believed to be stifling the Eurozone economies and are attracting considerable criticism.

The RBI's mandate is obviously to keep inflation in check. But how do we define inflation — of wholesale prices or consumer prices, overall or excluding volatile items like energy? And what is our inflation target?

Monetary and interest rate policies have to be structured and evolved around answers to these issues. The central bank has a lot of homework to do.

More Stories on : Insight | Financial Scan | Economy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page