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(From left) Indian Overseas Bank CMD M. Narendra, MSE director D.K. Srivasthava, MSE chairman C. Rangarajan and principal of RBI Staff Training College J. Sadakadulla at a seminar in Chennai on Monday.
CHENNAI: Chairman of Economic Advisory Council to the Prime Minister C. Rangarajan on Monday argued against the notion that high growth rates warrant a high level of inflation and advocated the use of fiscal and monetary policy instruments to re-anchor inflation estimates in the 4-5 per cent comfort zone.
Mr. Rangarajan was delivering the key-note address at a seminar on “Achieving Sustainable Growth with Price Stability: emerging Challenges,” hosted jointly by the Reserve Bank Staff Training College and the Madras School of Economics (MSE).
He argued that in the Indian context, where inflation was triggered by supply shocks than the growth rate, monetary and fiscal policy instruments, including intervention in the grain market, should be used to contain demand pressures. An inflation spiral triggered by growth, Mr. Rangarajan said, would occur only in a situation where an economy was running at a pace beyond its potential — a condition of “overheating.”
While ruling out any evidence of overheating in the case of the Indian economy, he said the extraordinarily high level of inflation seen in the last two years in the country was due to certain severe supply-side constraints, particularly relating to agricultural products.
“The last four weeks have shown a declining trend in vegetable prices and it is expected that inflation will come down to 7.5 per cent by March,” he said. He, however, stressed need to keep a watch on global crude oil prices.
Making a distinction between “hard inflation” — a feature of developing economies that were vulnerable to supply-side shocks — and “soft inflation” — which pertained to targeting price stability objectives — Mr. Rangarajan pointed out that in the early decades after Independence, the notion that inflation was endemic in economic growth led to steep price rises. “We should not let that happen. We must remain committed to maintain inflation at a low level.”
While the trade-off between price stability and economic growth was discussed in the framework of labour and output markets, an environment of reasonable price stability was more conducive to economic growth. In fact, price stability was a necessary condition for long-term growth, he said.
One of the ways of reconciling the conflicting objectives of price stability and economic growth in the short run was through estimating a threshold of inflation — a level beyond which costs of inflation were deemed to rise steeply and affect growth. While the Chakravarty Committee regarded the acceptable rise in prices as 4 per cent, Mr. Rangarajan settled for an inflation rate of 5-6 per cent that he deemed was more appropriate in the Indian context.
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