Predictably, the Reserve Bank of India has not fallen to the trap of assessing the trade-off between growth and inflation by sticking steadfastly to slaying the demon of inflation.
The inexorable anti-inflation strategy of the apex bank since March 2010 is understandable because inflation is aptly deemed the cruellest form of taxation to all those living on the margins in a country where precise estimates of absolute poor remain a polemical point.
But being growth-fetish, most of the pundits including policy makers and industrialists cried hoarse over the RBI's decision to hike the repo rate (rate at which it lends to banks) by 25 basis points to 8.5 per cent as a growth-throttling bid.
The 13 th revision in repo rate has exacerbated manufacturers and exporters at a time when the cost of borrowing had already become dear on the back of rupee depreciation which has rendered import of essential items and intermediates equally costly if not more.
The RBI Governor, Dr D. Subbarao, in his address at the Stern School of Business, New York University in September, justifiably argued that at low inflation and stable inflation expectations, there is definitely a trade-off between growth and inflation.
But above a certain threshold level of inflation, this relationship reverses, the trade-off vanishes in thin air and “high inflation actually starts taking a toll on growth”.
As he explained that estimates by the RBI using different methodologies put the threshold level of inflation in the range of 4-6 per cent, inflation based on wholesale price index ruling above 9 per cent and with food inflation, accounting for 14 per cent of headline inflation, already above double-digit level at 10.60 for the week ended October 7, “inflation is unambiguously inimical to growth”.
For the governing UPA dispensation swearing by inclusive growth through rights-based approach to basic requirements for aam adhmi , the inflation bull ought to be tamed if it is serious about ‘growth with equity'.
As such, its ministers need to be muted in their criticism of the central bank which has its canonical mantra to ensure price stability at a time when even developed countries face sovereign credit risk and swinging public debt that forced them to be austere and abstemious in their consumption pattern.
It is small wonder that the apex bank justified its policy stance in its second quarter review stating that “it has been calibrated on the basis on India-specific growth inflation dynamics in the broader context of persistent global uncertainty”.
Growth outlook
While lowering its growth outlook for 2011-12 from 8 per cent in May to 7.6 per cent now, the RBI has conceded that investment demand in the country has slackened, reflecting “slower clearance and execution of projects” (left unsaid is land and uncertainty over availability of critical inputs such as coal, gas and power) and “concerns about inflation and rising interest rates”.
Investors' insipid response to pulling the growth juggernaut cannot be faulted that the balance of blame is not only with the dear money policy of the apex bank but also because of policy inertia of the authorities, caught as they were, in a litany of scams and scandals.
In subsequent part of the review, the central bank flaunts its gumption candidly by conceding that “several factors — structural imbalances in agriculture, infrastructure capacity bottlenecks, distorted administered prices of several key commodities and the pace of fiscal consolidation — combine to keep medium-term inflation risks in the economy”.
According to the RBI, these risks could be mitigated by “concerted policy actions on several fronts” and warned that “in the absence of progress on these over the medium term, the monetary policy stance will have to take into account the risks of inflation surging in response to even a moderate growth recovery”.
Therein lays the palpable message to the Government to pull up the socks and do the governance genuinely, if it wants to ensure non-inflationary growth for a better living to all.