Low non-food manufacturing inflation may give breathing space to RBI: Rangarajan

But says both WPI and CPI inflation will remain high

With the non-food manufacturing inflation moderating, Prime Minister's Economic Advisory Council Chairman, C Rangarajan today said that it might give some space to monetary policy authorities.

“There are some signs of easing on the price front at least at the wholesale level. The non-food manufacturing inflation has come down to 2% as of September 2013. This gives some space for the monetary authorities,” Rangarajan said while speaking at a function at Coal India foundation day here.

However, he added that inflation, both wholesale and retail, will remain high.

“Inflation was largely due to certain severe supply constraints, particularly of agricultural products. The fact that inflation is triggered primarily by supply side shocks, does not, however, mean that monetary policy and fiscal policy have no role to play,” he added.

The Reserve Bank of India, in its second quarter monetary policy review, hiked the repo rate by 25 basis points to 7.75% on the back of high retail and headline inflation rate. The central bank had hiked the repo rate by 25 bps in September also.

According to him, India failed to anticipate the sharp rise in the manufacturing and services sector growth during 2010-11.

“The growth rate rose to 9.3% in 2010-11. the manufacturing sector grew by 11.3% and the services sector by 9.4%. Had we anticipated correctly this sharp rise in growth, we could have withdrawan some of the stimulus measures a little early. That could have moderated the inflationary tendencies,” Rangarajan noted.

Commenting on the current fiscal, he said the growth rate can be between 5 and 5.5% and an important contribution to the higher growth will be agriculture on the back of favourable monsoon.

“Recent data indicates that in 2012-13 the gross fixed capital formation rate, a measure of the accumulation of fixed assets by business, government and households, was around 30%. In normal situations, keeping in view the recent trends in the incremental capital output ratio(ICOR), which is around 4, this should have given a growth rate of 7 to 7.5% but actual rate turned out to be 5%. This may be because projects have not been completed and investment have not been forthcoming. We need to take actions to remove constraints that may come in the way,” he said.

Speaking about the Current Account Deficit, Rangarajan today reiterated his recent obswervation that CAD may remain well below $70 billion if the current trend of exports and imports continue. India’s trade deficit in the first half of this year was $80 billion as compared to $92 billion in the previous year.