Millennium Post

'Sacrifice GDP a bit to rein in prices'

As India seeks to control high inflation, RBI Governor D Subbarao has said a little sacrifice in growth is ‘inevitable’ amid efforts to bring down prices to acceptable levels.

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 Globalising World - Some Policy Dilemmas’.

Inflation based on the Wholesale Price Index stood at 6. 87 per cent in July, declining from 7.25 per cent in June.

It is still however much above RBI’s comfort level of 5-6 per cent. Noting that inflation was down from 11 per cent in 2010 to below seven per cent 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.

Subbarao refused to comment when asked if there will be a change in interest rates when the central bank reviews its policy on 17 September.

Subbarao appeared to have joined the debate on the recent controversial retrospective taxation provisions saying there is need to have a stable policy, taxation and investment regime to attract foreign capital.

‘India has to run a stable policy regime and have a stable taxation and investment regime,’ he said during his lecture at the Asia Society here.

‘We need to streamline our foreign investment policy and procedures, improve infrastructure, improve our governance,’ to make the system more friendly for investors, the RBI governor said.
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