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The Finance Ministry and the Reserve Bank of India seem to to be one on according priority to inflation control over pushing for higher growth.
“In the short run, lowering inflation can have a dampening effect on growth. But that is desirable if our aim is to achieve high, sustainable growth,” Dr Kaushik Basu, Chief Economic Advisor in the Finance Ministry, said at a meeting of the inter-ministerial group (IMG) on inflation here on Friday.
Maintaining momentum
The Finance Ministry, till recently, was emphasising the need to maintain the current growth momentum in the economy, while being generally tolerant to attendant inflationary pressures.
But at today's IMG meeting — which was also attended by the RBI Governor, Dr D. Subbarao, and senior officials from the Planning Commission and the Finance, Commerce, Agriculture and Food Ministries — Dr Basu made it clear that “any attempt to push growth above the potential will only lead to higher inflation, but no durable growth and employment gains”.
He was, in a sense, only echoing what Dr Subbarao had stated in a press interaction following the RBI's annual monetary policy announcement for 2011-12 on Tuesday: “The economy is now operating at near capacity. I don't think we can exploit higher growth by sacrificing inflation”.
The Governor reiterated the central bank's hawkish stance at the IMG meeting by noting that high inflation is “inimical” to sustained growth as it harms investment by creating uncertainty.
“Current elevated rates of inflation post significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short run, should take precedence,” Dr Subbarao pointed out while defending the RBI's recent move to raise its repo (lending) rate by 50 basis points as against the earlier 25 basis point instalments.
Petrol, diesel price hike
Today's meeting — the third by the IMG since its constitution in February — is significant as it comes ahead of the Centre's likely move to raise prices of diesel, petrol, LPG and urea once the State Assembly elections get over. Economists believe that the Centre would seek to offset the cascading impact of such administrative price increases through a tightening of monetary and fiscal policies.
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