Ajaya Kumar talks to D K Joshi, the chief economist at Crisil, a global ratings company, about India's inflation.
High Indian prices prove tough to crack
Do you see India's rising inflation hitting the country's economic growth? What's your inflation outlook for the current fiscal year?
In the short-run inflation hurts growth as interest rates are raised to curb demand. If high inflation persists for a long time, it can jeopardise the long-term growth potential as well. Maintaining low and stable inflation is necessary for sustained high growth. We expect inflationary pressures to continue and the current fiscal year [2011-12] to close with an average inflation of 8 to 8.5 per cent, above the Reserve Bank of India's comfort level of about 5 per cent.
Do you see a slowdown in economic growth? What's your growth forecast for the current fiscal year?
Yes. We are already beginning to see the impact of rising interest rates on private consumption and investment growth which are now beginning to slow. The industrial growth, too, is slowing down. Our growth forecast for the current fiscal is 7.7 to 8 per cent.
Does the Reserve Bank of India's monetary tightening having an impact on inflation?
The reason inflation has not come down despite aggressive rate hikes is predominantly supply side in nature. Inflation in India has largely been driven by supply shocks - food, fuel and commodity prices - which cannot be reduced by raising rates. Rate hikes only limit the transmission of these supply shocks to other sectors of the economy by compressing demand. Any hike in interest rates first reduces demand before curbing inflation. And this happens with a lag. While there are clear signs of a slowdown in domestic demand, the second leg of policy rate transmission is yet to occur. That is why interest rate hikes have not been very effective in inflation control until now. The depreciation of the rupee is further putting pressure on the imported component of India's inflation.
What do you think are the appropriate measures needed to contain inflation and sustain economic growth?
Controlling inflation: supply side measure aimed at improving agricultural production will help in ensuring adequate supply of food while keeping food inflation low. Also there is a need to cut down the retail margins in agriculture by improving storage facilities and supply chains where opening up foreign direct investment (FDI) in retail will help. To reduce the build-up of pressure from suppressed fuel prices and sudden spurts in inflation, India needs to align its domestic fuel prices to global crude prices movements. Government also needs to make timely interventions in the market with the release of food stocks whenever there is pressure on food prices. For sustaining high growth: at this juncture, the Indian economy should benefit from a fresh dose of reforms that aim to improve the investment climate and lift sagging business confidence. Fast-tracking the land acquisition bill, the goods and service tax implementation, and pension and insurance reforms, will go a long way in improving the current investment climate, in our view, as will opening up the retail sector for FDI participation. These measures aimed at raising the supply potential and competitiveness will also allow India to benefit more from a global upturn whenever that takes place.
What other factors do you believe are slowing India's economic growth?
In addition to interest rates, policy lethargy on a variety of issues, fuel linkage problems etcetera are slowing India's growth potential.