The consumer price inflation (CPI) target of 4+/-2 per cent for all years after FY16, set under a monetary policy framework (MPF) adopted by the government and the Reserve Bank, might require to be revisited, NITI Aayog vice-chairman Arvind Panagariya said on Thursday.
“The 2 per cent floor (defined under the MPF) appears to be a little too low. It could be reviewed,” he said at the Express Group’s Idea Exchange programme. He added that there was room for further reduction in the policy rate by the central bank.
Under the MPF signed by the government and the RBI in February this year, price stability was made the primary objective of monetary policy and a target was set for 6 per cent CPI inflation for FY16, which was to be achieved by January 2016 and 4 +/-2 per cent for all subsequent years. (The RBI has since set for itself a more exacting target of 5.8 per cent by January 2016, which it is poised to undershoot). It is also stipulated under the MPF that in the event of a failure to sustain the retail inflation at the prescribed levels over three consecutive quarters, the RBI will report to the government on the reasons for the deviation.
Retail inflation scaled a 14-month high of 5.41 per cent in November, but most analysts believe it would still remain below the central bank’s expectation of 5.8 per cent by January.
After cutting interest rates cumulatively by 125 basis points in 2015 as retail inflation eased, the RBI maintained status quo at its December 1 policy review.
Panagariya said the “economy has recovered” with many sectors including automobiles and several service industries doing well. The real GDP growth would touch 8 per cent by the fourth quarter of the current fiscal from 7.2 per cent in the first half, he added.
On the interest rate hike by the US Fed after nearly a decade, he said it won’t cause any major shock to India. The country’s forex reserves, he noted, were adequate.
Pitching for the China model of large economic zones along the coasts, Panagariya suggested that the upcoming Budget in February could include steps for the creation of large economic zones on the west and east coasts, which could be export drivers. Affirming his stance that exports could be a major source of growth for India, he said the $18-trillion world trade provided a huge opportunity for the country whose share in world trade is an abysmal 1.5 per cent right now.
When asked whether the NITI Aayog wouldn’t do better with some powers to allocate funds to the states, the noted economist, who underscored the merits of competitive cooperative federalism, said the national body could be helped in its focused interventions in districts with the ability to disburse monies to address specific local problems.
“We could incentivise states to undertake reforms,” he said, but drew a distinction between the role of the erstwhile Planning Commission and that of NITI Aayog. The Planning Commission used to sit in judgement on projects, he noted. FE