Inflation will be below RBI’s target: Chief Economic Adviser

Despite apprehensions on below normal monsoon, Chief Economic Adviser Arvind Subramanian has expressed confidence that inflation will be below the RBI’s target (of 5 per cent). Subramanian, who was fielded by the government to respond to key economic issues, feels the economy is on a recovery path. Excerpts from his response:

Inflation prospects

In macro terms, inflation is coming down. The quantity and quality of fiscal consolidation is actually very strong and is, in some ways, unanticipated, as (also) collateral benefits of implementing the 14{+t}{+h} Finance Commission recommendations. The fact that the Central government is contributing by way of quantity and quality of fiscal consolidation is actually very important for assessing inflation prospects, going forward. Yes, there is uncertainty of monsoon, but the fiscal is going to contribute quite substantially in keeping inflation under control.

Easing monetary policy

The monetary and exchange policies should be thought off together. Remember, China is now cutting interest rates quite aggressively in response to its growth slowing down, and that is going to make its currency more competitive. So, we need to respond accordingly.

The govt vis-à-vis RBI

Isn’t the RBI independent? Why are you putting pressure on that? So, between being too shy and too strong, there is whole grey area. We believe in the independence of the central bank and also believe in doing our own analysis. The two are consistent. I think the analysis is, that indications are clear. You just have to be intelligent about interpreting all this. There is no point in being too explicit, because there are people who are constitutionally vested with tasks about exactly looking into that.

Exchange rate policy

Most countries are trying to keep their currency competitive and cheap. The question is: How should we respond? I think given at the very least, we should take defensive action. We should not allow this to impact us. At the very best, we should not allow our currency to become uncompetitive. And I think, if we want ‘Make in India’ to be a long-term success, we have to have a very supportive currency policy. If you were to ask how China accumulated $4 trillion reserves, it’s essentially buying it to keep the currency very-very competitive. So, it is a lesson for all of us. It is not that we should imitate everything that China does, but I think that is the broader lesson. And, that is true for most of the East Asia.

Poor corporate balance sheets

I call this as a balance sheet syndrome with Indian characteristics. Essentially what we need is a mechanism by which the mistakes of the past and the cost inflicted need to be shared between promoters, banks, taxpayers and consumers. We need a process to do that and normally that happens through a legal process. In India, perhaps, we need other mechanisms. So, essentially, people will have to sit down and find that this mistake was made, so you take this much of hit. In the road sector, recently some projects were cleared based on exactly this kind of resolution mechanism.

Monsoon impact

I think the real reason for worry about the monsoon is its impact on rural incomes and inflation. On inflation, if we can release stocks on time and use our buffer well, I think that is manageable.

When it comes to rural income, we need to find a way of relieving the stress.

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