Bimal Jalan, former governor of the Reserve Bank of India and now a member of the Rajya Sabha, tells Mint’s Paromita Shastri that it doesn’t matter if growth is 7% instead of 9%, what matters is if inflation is 6% instead of 4%.
Will high inflation and monetary tightening hurt growth?
There is no conflict between good growth and moderate inflation. If you jump from an expectation of 7% growth to 9%, what is important is how fast you are doing the jump and how far. It’s important to know if the speed is sustainable. It does not matter to the people whether growth is 9% or 7% but it matters greatly if inflation is 4% or 7%. There are evidences of so-called overheating in the economy—30% credit growth, 20% money supply growth, 200% property prices growth.
So, you have to restrain demand; that is what monetary tightening is all about. For primary commodities, we have to look at the supply deficiencies because these have an impact on future demand and thereby inflation. We have to cool down this expectation of higher inflation.
How do you do that?
The Reserve Bank of India (RBI) is doing a lot, but a consolidated strategy is missing. Every week you see something different happening. One would have expected the high-inflation expectation to be built into the policy. An announcement to the effect that ‘this is what we are doing, in the meantime, we have to tolerate high inflation for the next four weeks or so’. There is good coordination between RBI and finance ministry but you need a common frame.
The finance ministry is confident that inflation will come down soon.
The Centre was surprised by the inflation and also expected it to come down on its own. It is not possible for me to say whether inflation will automatically come down to 5.5%. If all other indicators are doing well and growth comes down from 9% to 8%, I will not shed any tears. We already have three years of high growth.
What does this entail? More interest rate hikes? Why not duty cuts?
Both are needed. All economic signals are buoyant but you still see an imbalance. Money is coming from everywhere. Both external funds flow and domestic savings are high. But funds are not flowing to the banking system.
Let us create an equal playing field between banking and non-banking system. So if interest rates have to go up, savings must flow to all quarters and for that, you have to incentivize the flow of funds to the banks. People are searching for quick tax-free returns. You have to identify who is losing, and help them.