Finance secretary D Subbarao maintains monetary policy would continue to be the first line of defence in controlling inflation. While one might compromise on the momentum of growth, the India story is credible in the long-term, he tells P Vaidyanathan Iyer in an exclusive interview. Excerpts:
Do you expect a reversal in the inflation rate?
Not for the next few months. An inflation rate of close to 12 per cent is much beyond the tolerance level.
Manufacturing inflation, which was benign so far, is slowly rearing its head…
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We are quite concerned about that. Some analysts are saying manufacturing efficiency had improved and manufacturers had absorbed prices so far. Now, prices of manufactured products have started climbing. But companies do not have unrestrained pricing power. Their ability to raise prices is limited due to competition from imports, which is a positive side of liberalisation.
The government has been trying to force manufacturers (steel, cement) to hold or even reduce prices. Does it not undermine the profitability of the corporate sector?
It is not so much dictating prices. It is part of the government’s inflation management. Some sectors must accept responsibility for moderating prices.
How difficult is it to manage the expectations of the mining and steel industries that have conflicting demands?
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It is a big challenge before the government to manage the concerns of the mining industry since it offers huge employment and of the steel companies as well because they require low-cost iron ore. Managing a trade-off is the challenge.
The finance ministry has often said monetary policy would be the first line of defence to manage inflation. Will a tighter monetary stance not affect growth?
There is a trade-off between growth and inflation. Monetary tightening will inevitably compromise the growth prospects in the short term. But, the long-term growth story will not be hurt. India is still a credible long-term story.
Where do you expect moderation in growth this fiscal?
If you look at our GDP composition, agriculture constitutes 18 per cent. It put up a good performance last year. As far as industry is concerned, there are some concerns in manufacturing as shown by numbers. But, there is a lot of investment in the pipeline. Inflation in input prices also means higher profits for some companies. There is no big slowdown in industrial output. In services that account for 55 per cent of the GDP, some sectors such as transport and travel may be hit.
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