The Hindu Business Line : Economy overheating?

This is with reference to "Is the economy overheating" (Business Line, December 22): There might be a difference in the perception of the Ministry of Finance and the Reserve Bank of India as to whether the economy is overheated or not. The real issue, however, is to take macro-economic policy measures on the demand- and supply-side to ensure that the inflation rate, which has started to rise, does not exceed the target range of 5-5.5 per cent by the year-end.

The RBI, on its part, has increased the CRR by 50 basis points to mop up the liquidity with banks so that the abnormal growth in non-food bank credit (affecting the aggregate effective demand) in the economy is slowed. This has to be seen as a proactive measure on the demand-side to contain the growth of inflation. The Ministry of Finance, on its part, can take measures on the supply-side for instance, by permitting duty-free imports of foodgrains.

Long-term measures could include increasing acreage under foodgrains, increasing the minimum support price to overcome the shortages in production of foodgrains whose shortage has fuelled the inflation. Bank credit could be used to finance the production, distribution and storage of food articles. Thus, while the economy's growth rates continue to be impressive, the monster of inflation has to be reined in.

S. K. Kataria

New Delhi

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