'Need to bring inflation to 5%'

Reserve Bank of India (RBI) Governor D Subbarao on Friday said inflation must be brought down to five per cent, or below that, to stabilise the macroeconomic environment and facilitate sustainable growth.

"A high-inflation scenario makes both savers and investors uncertain," said Subbarao. He added the monetary tightening policy was aimed at restraining demand and anchoring inflation expectations. India's inflation indicator — the wholesale price index — has been above nine per cent for the last few months. To tame inflation, RBI has raised policy rates by 375 basis points in thirteen tranches since March 2010. The central bank expects inflation to ease in the December-January period, before declining to seven per cent by the end of March.

While monetary tightening addresses demand-side pressures, the central bank's efforts must be complemented by supply-side responses. "The current inflation we are experiencing is a consequence of both supply shocks and demand pressures," Subbarao said, adding it was necessary to reduce the government's high fiscal deficit to stabilise growth to sustainable levels. For the current financial year, the government had estimated fiscal deficit at 4.6 per cent of the gross domestic product (GDP), and this now increasingly seen as a difficult target.

The RBI governor said India's growth was credible, but the country needed to increase agricultural productivity, expand employment and productivity, promote financial inclusion and bridge infrastructure deficit. He said infrastructure deficit was hampering faster economic growth and efforts to curb the deficit had fallen short. The annual infrastructure investment would have to be increased to 10 per cent of GDP from the current six per cent to meet the requirement of $1 trillion over next five years, as estimated in the 12th Plan.

Pointing to the need of infrastructure financing in India, Subbarao said projects should be financed by long-term sources like insurance and pension funds, not banks, which could face exposure risks and asset-liability mismatches. "Since these markets in India are still not deep enough, the burden of financing infrastructure is falling on banks," he said. Corporate debt would go a long way in augmenting infrastructure financing, but the market was demand-constrained and needed attention, he added.

On financial inclusion, he said banks continued to see it as an obligation, not an opportunity. He emphasised banks need to change their perceptions and tap business opportunities in unbanked areas.

‘Elephant dance must be rejigged’
RBI Governor D Subbarao on Friday said just as East Asians resembled tigers and China the dragon, India stood for an elephant. India's high-growth trajectory before the crisis proved elephants, too, could dance. "But the elephant dance was interrupted by the ‘zoo party’ of the global financial crisis. To get it back on course, we need to rejig the dance," he said.