The Finance Ministry views high inflation as a bigger worry vis-a-vis growth. It favours slow down in bank credit growth not only to match it with deposit expansion, but also to moderate demand pressure on inflation.
However, it maintains that needs of productive sectors would be maintained even if credit growth comes down.
Inflation has become a bigger concern compared to growth, senior Finance Ministry officials told Business Standard. Inflation had started moderating by November, but rose in December on the back of expensive food items. It stood at 8.4 per cent in December from 7.4 per cent last month. It is expected to be down to 6.5-7 per cent by this financial year.
While RBI has revised its earlier estimates of inflation at 5.5 per cent to 7 per cent over this period, the Finance Ministry has upped its projections to 6.5 per cent from 6 per cent.
If these projections indeed come true, inflation at the end of this financial year would be somewhat moderate than 10.2 per cent witnessed in March 2010. However, despite the high base effect, inflation has not come down drastically. This clearly shows that prices rose significantly this year.
High inflation in March 2010, could be partly attributed to low base effect of 1.5 per cent a year ago. In the previous two years, it stood at 7.7 per cent and 6.8 per cent. As such inflation by the end of this financial year will be much close of what was witnessed at the close of 2006-07, if projections by RBI and the Finance Ministry come true.
Earlier, Chief Economic Adviser Kaushik Basu had also said that the government may have to live with high inflation for a little longer than expected. “The battle against inflation, which we were hoping would come to an end by March-April, will probably continue for some more months,” Basu had said.
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Crisil chief economist D K Joshi said, "Inflation will remain a concern in 2011. Going forward, pressure points will emerge from oil, commodity and minerals etc."
The Finance Ministry officials favoured RBI prescription of lowering credit growth, if there continues to be asset-liability mismatch. This will not only address the issue of mismatch between credit and deposit growth, but would also dampen the demand pressure on inflation, they said.
Even as the official said inflation has become a bigger cause of concern than growth, the ministry does not see any reason to revise down growth targets and is confident that at least 8.7 per cent growth is achievable this financial year.
Joshi, however, felt that there was a trade-off between inflation and growth in the short-term, but even then sticks to his growth projections of 8.6 per cent for this year. The Indian economy expanded by 8.9 per cent in the first half, after the growth slowed down to 6.7 per cent during 2008-09 due to the ripple effects of global financial crisis and slightly better growth of 7.4 per cent last fiscal due to stimulus measures.
The RBI in its monetary review had said there is some evidence of rising demand side pressures which are reflected in rapid bank credit growth, robust corporate sales and rising input and output prices, and buoyancy in tax revenues. "The need, therefore, is to persist with measures to contain inflation and anchor inflationary expectations," the central bank said, while announcing 25 basis points increase in reverse repo and repo rates to curb inflation.
Prompted by RBI, several banks raised their deposit rates after the central bank's second quarterly review on November 2 by up to 250 basis points.
This led to a larger deposit mobilisation in December. But deposits again fell in January. After surging around Rs 200,000 crore in the last fortnight of December, bank deposits fell Rs 25,742 crore during the 14-day period ended January 14.
Even after increase, the fixed deposit rates range between 7 and 8 per cent. This is lower than 8.43 per cent inflation, and thus fetches negative returns in real terms. But, then credit off-take also dropped Rs 43,327 crore during the fortnight and if the trend persists, the gap between credit growth and deposit growth may narrow in times to continue. It will be wise to increase the deposit growth, to bring down the gap.
It warned that rapid credit growth without a commensurate increase in deposits is not sustainable.
As such, the Reserve Bank said it will constantly monitor the credit growth and, if necessary, will engage with banks which show an abnormal incremental credit-deposit ratio.