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No excessive step needed: Govt to RBI

The Finance Ministry today said food inflation had stabilised and core or non-food manufacturing inflation (excluding fuel and food products)...

Written by Gunjan Pradhan Sinha |
June 15, 2010 3:56:31 am

The Finance Ministry today said food inflation had stabilised and core or non-food manufacturing inflation (excluding fuel and food products) was not that high either. “There is no need to take excessive steps,” said Kaushik Basu,Chief Economic Advisor,Ministry of Finance,when asked if it was time for mid-course tightening measures by the Reserve Bank of India.

According to government data released today,inflation based on the wholesale price index for May stood at 10.16 per cent compared with 1.38 per cent for May 2009. The data also showed that final inflation for March was 11.04 per cent,higher than the provisional 9.90 per cent.

Double-digit inflation numbers have ignited fears of a mid-course correction — a hike in cash reserve ratio (CRR) or the amount of deposits banks have to keep with the RBI and a repo rate hike or the rate at which the RBI lends to banks — ahead of its first quarter review due on July 27.

Basu said he would be meeting officials at RBI at some point to discuss the current economic environment and possible course of action. It would,however,be good to bring core inflation down to about 5 per cent and hold it at this level,he said. “But,even at 5.8 per cent (for April),it is not atrocious.”

The RBI and policy-makers give considerable importance to core inflation data,since it does not include food and fuel products whose prices are normally volatile. From minus 0.4 per cent in November 2009,it has shot up to 5.8 per cent in April.

This has not escaped the RBI’s attention. In a recent interview to The Indian Express,RBI Deputy Governor Subir Gokarn said there had clearly been an acceleration in non-food manufacturing inflation,adding that the central bank would not digress from the trajectory of monetary tightening set last year.

Basu said the core inflation at this level may not have an adverse impact on the economy as manufacturing constitutes a very small part of the country’s gross domestic product (GDP). “Manufacturing is too small for a country that is as vibrant as India,” he said,even as he underscored the need for any mid-term correction that will adversely affect the sector which generates huge employment.

The growth scenario,Basu said,was better than expected,with manufacturing boosting the economy. “Manufacturing is a surprise in the positive direction,having grown at 8.4 per cent. Investment too has picked up — for the last quarter of 2009-10,it stood at 34.6 per cent compared with 32.9 per cent for the full year 2009-10.”

A combination of high growth in industrial production and high non-food manufacturing inflation generally calls for textbook monetary tightening by the central bank. “IIP is high not only on account of a vibrant performance of the manufacturing sector but also due to last year’s base effect. The fact that two segments of the IIP — capital goods and consumer durables — are high,is an indication of the fact that there is growing optimism among the corporate and consumers is high,” Basu said.

He also expressed great confidence in the fiscal health of the economy which is expected to pave the way for robust long term growth. He attributed the high inflation to seasonal factors including sugar cane prices. The other two items pushing up inflation include raw cotton and jute.

“The Ministry of Finance and Planning Commission are working on computing a de-seasonalised inflation,which also give us the other side of the picture,” he said.

Even though food inflation is hovering above 16 per cent at the moment,it is not a cause of worry,said Basu. “In the last six months,food price inflation is not inflating anymore. The index is around 296. This essentially means that food inflation has tapered off and the numbers factor in the base effect.”

Basu also supported government’s move to deregulate fuel prices. “If we de-administer fuel prices,it will lower under-recoveries of oil marketing companies and put lesser pressure on fiscal side. Large deficit feeds into larger inflation. Therefore,it is a move in the right direction and should be done sooner or later,” he said.

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