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GST can help contain inflation: Gokarn

The Reserve Bank has been battling inflation for past two years.

Written by Agencies | Mumbai | Published: March 30, 2012 7:08:09 pm

The Reserve Bank,which has been battling inflation for past two years,today said the introduction of the Goods and Services Tax (GST) can help contain price rise as the proposed common tax regime can take off the demand pressures from the market.

“The GST is going to make a huge difference in the way the government is going to manage its finances. And as it comes into play,it will be a critical reform in terms of catalysing growth.

“This is because it will help contain government finances and help take off demand pressures that,as we have seen,has been contributing to inflation over the past few years,” RBI Deputy Governor Subir Gokarn said.

Addressing the industry chamber CII’s western region annual meeting here,Gokarn,who handles the monetary policy at the Mint Road,also hinged lower interest rate with GST rollout.

“The GST can create the space for interest rates to come down and contribute to growth momentum,” he said.

Reiterating that there can be no trade off between high inflation and high growth rate,he said,dealing with prices is important to re-create high growth and that “a sustained low inflation is a pre-condition for high growth”.

He pointed out that the country had a reasonably low inflation when GDP was clocking an average of 8.5 per cent growth during the 2004-08 period.

After a high growth of 8.4 per cent last fiscal,economic growth is set to slow sharply to 6.9 per cent this fiscal. In Q3,GDP decelerated to a three-year low of 6.1 per cent.

Despite this,inflation remains high,forcing the monetary authority to keep a tight leash on interest rate,which during the March 2010-October 2011 period has gone up by 250 basis points to 8.5 percent.

However,a higher interest rate did not bring down inflation to the desired level of RBI. One reason was higher fiscal deficit coupled with higher subsidy bill of the government,apart from severe supply side bottlenecks.

This has blunted the RBI battle against inflation,which for February rose to 6.96 percent year-on-year from 6.45 per cent in the previous month.

Earlier this week,Gokarn had said the newly-introduced consumer price index would be a useful tool for assessing domestic sources of inflation with more data but the measure was still young and had limitations.

On the Budget,Gokarn said the broad fiscal measures such as the resolve to move onto a rule-based fiscal management model under the FRBM Act,and the bid to cap subsidies under 2 per cent of GDP would go a long way in containing inflation.

“A low fiscal deficit will help in bringing down interest rates and boosting investments,” he said.

The Budget has sought to bring down fiscal deficit to 5.1 per cent of GDP next fiscal from 5.9 per cent this year,and put a cap on the subsidies at 1.9 per cent.

Gokarn also felt the global economic growth will remain slow. “One must be very realistic about the global economy. Global economic growth is slow and will remain slow. Oil remains costly and is likely to continue at an elevated level,” he said.

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