Responding to criticism over high inflation, the RBI governor said some sacrifice of growth in inevitable, a necessary price we have to pay to bring down inflation
New York: As India seeks to control high inflation, Reserve Bank of India (RBI) Governor D Subbarao has said a little sacrifice in growth is "inevitable" amid efforts to bring down prices to acceptable levels, reports PTI.
Subbarao said criticism is often directed towards the central bank that even though it has raised interest rates and runs a tight monetary policy, inflation is still "high and persistent" and growth has been hurt.
The RBI's response to the criticism is that "some sacrifice of growth in inevitable, a necessary price we have to pay to bring down inflation. But that sacrifice of growth is only in the short term.
"In the medium term, a low and stable inflation is a necessary precondition for securing India's growth prospects," Subbarao said during a lecture at Asia Society on 'India in a Globalizing World - Some Policy Dilemmas', here on Wednesday.
Inflation based on the Wholesale Price Index stood at 6.87% in July, declining from 7.25% in June.
It is still however much above RBI's comfort level of 5-6%.
Noting that inflation was down from 11% in 2010 to below 7% in July this year, Subbarao said inflation could have been much higher if RBI had not run a tight policy.
The challenge for the RBI is to ensure inflation is reined in without hurting growth, he said.
"In order to support growth, we need to keep interest rates low but in order to rein in inflation we have to keep interest rates high. The challenge is how do we manage growth-inflation trade off," he said.
The Reserve Bank had cut rate in April by 50 basis points to 8 percent but the central bank left the benchmark interest rates unchanged in its first quarter credit policy review in July despite pressure from the industry, which wants reduction in interest rates to spur growth.
Subbarao refused to comment when asked if there will be a change in interest rates when the central bank reviews its policy on 17th September.
"Inflation hurts the poor the most. We have to listen to the silent voice of the poor. They do not have a mechanism for articulating their demand for bringing down inflation.
"So even as we listen to demand of potential investors for low interest rate regime, we also need to be sensitive to the burden of the poor because of high inflation," he said.
He said the structural food inflation is a "problem of success". "As India grew, benefits of growth are going to lower income groups," which are eating better.
While oil and commodity prices have softened in the recent months worldwide, India has not had the full benefit of this softening because of the rupee depreciation, he added.
The Prime Minister's Economic Advisory Council had pegged GDP growth for the current financial year at 6.7%.
Industrial production recorded a dismal growth of 2.4% in May and the overall economic growth slowed to nine-year low of 6.5% in 2011-12.
Subbarao said while part of the growth moderation is because of the global slowdown, domestic factors like the tight monetary policy, high interest rate regime, infrastructure bottlenecks, slow clearances of projects, host of governance issues and decline in sentiment of potential
He said fiscal deficit in India is also high and that is putting pressure on demand and inflation.
The Current Account Deficit was 4.2% of GDP last year, which was a quite high.
"One of the dilemmas in managing capital account is that we have to run a fairly stable regime. We cannot be fickle- minded in terms of policy. It cannot be that we allow capital today and disallow it tomorrow," he said.
Potential foreign investors have to have confidence that India has a stable, predictable, transparent capital sector regime," he said.
Subbarao sought to allay concerns that the investment climate in India is losing its attractiveness among foreign investors, saying the country still has an investor friendly environment with the central and state governments anxious to attract investments.
"India has to run a stable policy regime and have a stable taxation and investment regime," he said in response to a question on what India should be doing to inspire trust and confidence of investors.
"We need to streamline our foreign investment policy and procedures, improve infrastructure, improve our governance," to make the system more friendly for investors, he added.
He said his recommendation to the government will be to "embark on credible fiscal consolidation, as fiscal deficits are bad since they exacerbate inflationary pressures".