New Delhi: India should aim for annual inflation at 5% and try to lower this for economic growth to benefit the broader population, the Planning Commission said in an internal document.
“Price stability is imperative for realising inclusive economic growth,” according to the draft paper, circulated as part of a review of the economy, and obtained by Reuters.
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Wholesale price inflation was almost 10% in February, sparking off street protests and last week prompted the Reserve Bank of India (RBI) to raise interest rates ahead of a scheduled policy review in April.
“In order to achieve price stability, we need to target a headline rate of inflation for both CPI (consumer price inflation) and WPI indices of 5% and then progressively lower. This ... is quite within the realm of possibilities.”
The document needs final approval by the National Development Council, which is headed by Prime Minister Manmohan Singh.
The RBI does not follow a policy of targeting inflation like some other central banks, but analysts say it sees inflation of around 5% as being in its comfort zone.
Governor Duvvuri Subbarao has said the country cannot target inflation as the transmission of monetary policy is muted and it is difficult for monetary policy to attack supply-side driven inflation.
WPI averaged an annual 5.5% in the period between 2007-08 and 2009-10. CPI, which was at 16.2% in January, has averaged 9.3% in the three years to 2009-10.
The document said policy was needed to ease inflationary pressures and relax the “serious constraints in production and distribution” that were the primary causes for the elevated price levels.
India has blamed the recent inflationary spell on poor farm output caused by the worst drought in decades followed by floods in some parts of the country.
Food inflation stood at 16.22% in mid-March, easing for the third straight week as new winter harvested crop reached the market.
The document estimated capital inflows in the year that begins on 1 April to touch $80 billion and rising to $90 billion the following year.
The resultant increase in foreign reserves, estimated at 2-2.5% in both of the years, “can be easily absorbed without much difficulty”, the document said.
A top adviser has said inflows in 2009-10 could be $57-60 billion and the economy has the capacity to absorb nearly $100 billion.
Capital flows into India are seen rising on the back of a robust economy and on expectations for higher interest rates.
A Reuters poll estimates a further rise of 100 basis points in key rates by the end of 2010.