M. Govinda Rao, director, National Institute of Public Finance and Policy, New Delhi, and member of the Prime Minister’s economic advisory council, talks to Mint’s Paromita Shastri.
Are we looking at a trade-off between growth and inflation?
I don’t think there is a trade-off between inflation and growth. They are not mutually exclusive. We can even have high real growth with high interest rates. The spurt in inflation is a localized, short-supply-of-commodity issue. Supply management will not hurt growth, rather it will help!
Why haven’t we been able to manage inflation?
You are looking at the wrong place. Why blame the Reserve Bank of India (RBI) for monetary tightening? The steps taken by RBI may have controlled speculation in housing or stock markets. But how will that help commodity prices to stabilize? If you have to blame somebody, blame the agriculture ministry for not foreseing the need for imports.
In mature, open financial markets we could have sensed the supply-demand situation through the futures market and then, based on the global prices of the commodity concerned, domestic prices would have come in line. In the case of a scarcity, such markets would have seen a one-time inflation, compared with the secular and continuing inflation here. If we had futures trading in onions, the effect of expectations on prices could have been avoided.
Do we need more fiscal steps?
We are a closed economy in the case of many commodities. Until we open up, we need to do micro-management. There are also infrastructure bottlenecks in supply. There has been hoarding in wheat due to bad weather in January, in the hope that prices would climb further. But that will be coming to the market now. Overall, inflation will stabilize at 6.5% for the rest of the year.