PM’s key economic advisor says RBI should have been hawkish earlier.
As the fiscal policy is not helping much to contain inflation, Prime Minister’s key economic advisor C Rangarajan on Thursday pinned hopes on monetary tools adopted by the Reserve Bank of India (RBI) to contain price pressures and suggested that the central bank should have taken more aggressive measures earlier than “baby steps” it resorted to.
He also suggested that excise duty rates be raised, but not during this financial year, but the beginning of the next financial year to adjust it to a pre-crisis level, which means a hike of four percentage points.
“RBI took baby steps to contain inflation...Aggressive policy earlier would have been a preferred policy alternative,” Prime Minister’s Economic Advisory Council Chairman said at the Economic Editors’ Conference here.
Since March 2010, RBI has increased policy rates 12 times. Usually it raised both repo and reverse repo rates by 25 basis points. It hiked repo by 50 basis points only twice and reverse repo four times. Now, the central bank does not hike reverse repo, it automatically moves in tandem with repo rate with a corridor of one percentage point.
Rangarajan dismissed the views of some journalists that RBI’s tightening stance is not having an impact on inflation.
“Inflation would have been much higher, had RBI not resorted to monetary tightening,” he said.
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He refused to give any suggestion on the quantum of increase by RBI in the repo rate at its monetary review of the second quarter on October 25.
Given high inflation and decelerating economic growth parameters, Rangarajan said taming the rate of price rise was clearly a priority for the central bank. He said deceleration in industrial growth to sub-five per cent in the first two months of the second quarter could not be entirely blamed on RBI’s tight monetary stance. He elaborated on it by saying that mining contracted in two of the first five months of this financial year due to a contraction in coal production, which is not related to interest rates.
He said policy rates now were lower than the pre-crisis level. “The responsibility of the central bank is to tame inflation if it remains way above expected levels.”
Rangarajan finds meeting budget target of reining in fiscal deficit at 4.6 per cent of gross domestic product as a “herculean task” and advised the government that every step should be taken to meet the budget target.
“As the fiscal policy is not helping much to contain inflation, the responsibility lies on RBI,” Rangarajan, himself a former RBI governor, said.
To a query, the PMEAC chairman said he theoretically supported an idea of raising excise duty, but this could not be done during a year. “Going ahead, I suggest we should raise excise rates...Next year (in Budget) it is something that one can do...I would suggest that we really need to raise the excise rates to the level at which they were prior to the crisis.”
Since December 2008, the government had cut excise duty by six percentage points in phases to stimulate the industry at the time of the global financial crisis. It subsequently raised the duty, but by only two percentage points to 10 per cent.
He listed de-control of diesel price as of the policy decisions to rein in fiscal deficit, adding the government could move in that direction once inflation starts falling. “We cannot wait inflation to fall to comfortable levels in order to decontrol diesel prices,” he added.
He, however, said the move to de-control diesel prices was in a dilemma, as it also pushes up inflation. Without such a move, the government’s subsidy burden would increase to meet underrecoveries of public sector oil marketing companies.
Meeting a Rs 40,000-crore target for disinvestment was another prescription from Rangarajan to the government to rein in fiscal deficit.
When asked whether a suggestion by an inter-ministerial group to allow foreign direct investment in multi-brand retail would tame inflation, he said the two issues were independent of each other.
He reiterated that economic growth in FY12 would be close to eight per cent, against 8.2 suggested by PMEAC earlier.
From a macroeconomic point of view, he listed inflation and balance of payments as two critical issues and from sectoral point of view agriculture and power as two challenges for the government to take India on a sustained growth path.