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India's growth rate to be maintained at 8% to curb inflation: Subir Gokarn

19 Aug 2011 Evaluate

Maintaining its stand on India’s economic growth rate, the Reserve Bank of India (RBI) Deputy Governor Subir Gokarn on August 18 said, India's growth rate should be maintained at around 8% for a while to tame inflation and spur growth at a later stage. For the current financial year, RBI has forecasted Indian economy to grow by 8%, due to uncertainty in global economy and stubbornly high inflation. However, RBI Deputy Governor said that the objective was to ensure maximum growth without provoking inflation.

Giving reference to India’s past experience in support of his argument Subir Gokarn said, “Our past experience substantiates this argument. When our growth rate was around seven per cent, inflation was peaking and corrective monetary measures were taken. This eventually led to 8.5 per cent growth at a later stage.” By adding further he said, ‘this may result in somewhat slower growth than is possible at any given time, but it would help achieve sustained high growth.’ On RBI’s non-stop hike in its key policy rates since March 2010, he said the moves were essential and tailored with the objective of controlling inflation.

Since March, RBI has increased its interest rates for more than 11 times, and on July 26 it increased its short term leading and borrowing rates by 50 basis points. These hikes in its key policy rate were taken to curb inflation, which has been more than 8% during the 2010-11 and in current finance year i.e. April to July 2011, head line inflation measured by wholesale price index (WPI) has been more than 9%.

For reducing inflation, deputy governor said public spending should be curbed to an extent to spur private investment and create capacities and demand, leading to healthier growth and lower inflation. Low inflation is associated with growth sustainability. Among other channels, it also has a positive impact on investment. High inflation, even with high growth, is not conducive to investment or corporate performance, he added.

On the virtuous cycle of low inflation, fiscal consolidation, high investment and high growth, deputy governor said corporate performance benefits from this cycle and data for the last financial year on corporate performances substantiated this fact. “There is a drop in the margin levels for the first quarter of the ongoing financial year, but I don't see any meltdown. Corporates are managing to pass on the increase in input costs to an extent and recent inflationary pressures are being exacerbated by structural trends in food prices,” he added.

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