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Journalism of Courage
The government seems dead serious about corralling inflation. It cut customs duty on a variety of products on Monday, temporarily banned futures trade in urad and tur on Tuesday, and cut duties on edible oils on Wednesday. RBI governor YV Reddy will unveil his anti-inflation armoury on January 31, when he undertakes a quarterly review of monetary policy.
While the finance ministry and RBI spend sleepless nights, we caught up with Raghuram G Rajan, the Eric J. Gleacher Distinguished Service Professor of Finance at The University of Chicago Graduate Business School, who was until December the IMF’s economic counsellor and director of research, for his views on sacrificing growth to contain inflation.
If he were the central banker, Rajan says, he’d be vigilant on inflation. “The RBI can’t forego the notion that growth is part of its mandate, but it has to be keenly aware that inflation tends to be a tax, which is most damaging to the poor. Not just politically very damaging, it is very damaging to the country in a distributional sense too,” he adds.
While Rajan says inflation is largely a monetary phenomenon, fiscal measures taken by the government do not surprise him. The question is, from where does this inflation stem. If it’s coming from excess demand, you will have to cut back. This will imply slowing growth somewhat. In the classic view, this shows too much demand chasing too few goods.
There are ways to alleviate these pressures. But there are limits as India is running a reasonably large current account deficit. “At some point, there’ll have to be have a trade-off between helter-skelter growth but also high inflation and cut back on inflation at the expense of some growth,” Rajan says.
You don’t want to kill growth, but bring inflation within bounds. The danger of letting inflation go beyond 5-5.5 per cent is it will become entrenched in people’s expectations. At 6.12 per cent, it is already beyond the upper limit. How persistent is this and how much will lower oil prices feed in to bring it down, Rajan asks.
Similarly, commodity prices — do they reflect speculative activity? If they do, quelling speculation might be useful. But is it largely because people are growing richer and there is greater demand for foodgrains. And the supply is limited. It is true that foodgrain production has been stagnant in India and there is a supply constraint. This means you have genuine inflation, not one driven by speculators, feels Rajan.
