Inflation is expected to remain high for the next three months and the Reserve Bank of India’s next move on policy rates depends much on how the situation pans out in the coming three weeks, according to Prime Minister’s economic advisory council chairman C Rangarajan.
“Monetary policy has a role to play even in supply-side inflation,” he said while indicating that further hike in policy rates is imminent if the inflation stays high. Inflation may come down to 7 per cent from the present 9.6 per cent level only by March 2012, he maintained.
On the other hand, the constraints in maintaining the deserved levels of current account deficit and fiscal deficit have become more pronounced on account of the current global economic scenario even as monetary and fiscal measures are equally needed to balance growth and inflation in the country, according to him.
It is difficult to maintain the current account deficit at the current level of 2.5 per cent of the GDP if the world economic situation worsens, affecting the capital inflows into the country.
Expenditure side management is also getting difficult on account of ballooning subsidies, especially due to international oil prices, to keep the fiscal deficit at 4.6 per cent of the GDP as targeted, he said.
Delivering the foundation lecture for the civil services and IFS officer trainees on Tuesday, Rangarajan said the economy had the potential to grow at 9 per cent but the short and medium term constraints, including inflation, were to be attended to realise the potential.
Despite the present constraints, the economy is expected to grow close to 8 per cent in the current financial year though strict measures to manage both the supply and demand side inflation are required to ensure that the kind of high inflation witnessed during 70s and 80s did not return.
Growth in incomes is just one dimension of the development and who benefits from the economic development is equally important, he said, stating that social security measures like the National Rural Employment Guarantee Scheme were aimed at addressing these inherent needs.
While admitting that problems in land acquisition had been coming in way of faster capacity additions in power sector, he, however, said the conflicting interests in the economy had to be addressed as in the case of land acquisition.
Responding to a question, he said the efficiency in use of capital in proportion to output was at acceptable level and further improvement was always desired. He also said the Indian IT sector might get impacted to the extent of economic slowdown in the US and Eurozone.
However, he does not see the possibility of the US economy entering the negative growth zone.
