Attempt to push growth above potential will boost inflation: RBI

After matching GDP target,RBI amp; FinMin agree on growth-inflation trade-off

Reserve Bank of India governor D Subbarao on Friday stressed that any attempt to push growth above the potential would only lead to higher inflation but no durable growth or employment gains. On the growth-inflation trade-off,the Indian as well as the international experience suggests that there is no long-run trade-off between growth and inflation, Subbarao said at the meeting of inter ministerial group IMG on inflation.

In its third meeting,the IMG chaired by finance ministrys chief economic adviser Kaushik Basu discussed macro economic demand management,the relation between price rise and growth,as well as the RBIs role in controlling inflation. Basu also agreed with the central banks views and said that in the long run there is no conflict between the objectives of high growth and low inflation. In the short run,lowering inflation can have a dampening effect on growth,as the traditional Philips curve analysis suggests. But that is desirable,he said,if our aim is to achieve high,sustainable growth, he said.

Earlier this week,the RBI had hiked the key policy rates by 50 basis points to tame inflation,which was seen as an aggressive stand that could slow down economic growth. It also pared down its GDP forecast for 2011-12 to about 8 per cent as against the governments expectations of a 9 per cent growth.

The RBIs understanding of short-term and long term inflation situation was explained to the IMG, Subbarao told reporters after the meeting where he also made a presentation on the inflation situation in India.

Our discussion was largely theoretical in nature and we looked at issues such as whether inflation control in imperative for managing prices and as well as whether it should be the RBIs sole focus, said an official present at the meeting. The IMG is understood to have also sought data from the ministry of agriculture on food prices from the farm to the retail level in order to understand reasons behind price rise.

Though food inflation came down to 8.53 per cent in April from the 20 per cent level seen in February last year,actual prices of food items continue to remain high.