Subbarao allays deflationary fears

Subbarao allays deflationary fears
Business Standard, June 21, 2009, Page 5

Bloomberg

Reiterates RBI's commitment to reversing 'expansionary' monetary policy.

Reserve Bank of India Governor Duvvuri Subbarao said there was no risk of deflation after the benchmark price index fell for the first time in three decades.

“India doesn’t suffer from any demand contraction, therefore there should be no concern about negative inflation,” the central bank governor said today in Pune. Negative inflation “should be seen more as a statistical feature rather than a structural attribute of the economy.”

Wholesale prices fell for the first time in three decades, the government said on June 18. The benchmark wholesale-price inflation index declined 1.61 per cent in the week to June 6 from a year earlier. The dip has only a “statistical significance” and wholesale price gains will quicken to 4 per cent by March 2010, according to RBI.

Inflation has eased from a 16-year high of 12.91 per cent in August last year, enabling the central bank to reduce interest rates to a record to bolster an economy expanding at the slowest pace since 2003. The Reserve Bank last cut its key reverse repurchase rate by a quarter point to 3.25 per cent on April 21.

The central bank estimates that six interest-rate cuts in seven months and three stimulus packages will provide a combined stimulus equal to about 7 per cent of gross domestic product in the $1.2-trillion economy.

Subbarao said, “The Reserve Bank looks at other inflation gauges beside the wholesale price index when deciding its monetary stance.”

Price indicators

India has four price indexes and uses the wholesale price index as the benchmark because the other inflation gauges don’t capture the aggregate price picture.

Prices of food and primary articles were still high, Subbarao said. In a poor country like India, it is important to ensure food prices were reasonable, he said. The central bank would consider all price trends in its July review, when it would also revisit growth and inflation targets, he said.

Prime Minister Manmohan Singh’s electoral victory last month raised expectations that he will implement policies to promote growth. Finance Minister Pranab Mukherjee, due to unveil the Budget in New Delhi on July 6, has indicated more will be spent on roads, ports and a rural jobs programme.

Expansionary policies
That puts the government at odds with the central bank. Subbarao said last month it might be time to start thinking about reversing “expansionary” policies. The Reserve Bank’s next monetary policy statement is due to be released in late July.

“I am unable to say when exactly we will do it, but we must recognise that reversing these expansionary policies is part of the game, is part of economic management,” he reiterated today.

The governor said it was important for stimulus plans to work fully and that they have had some effect on some sectors of the economy, such as steel, cement, two-wheelers and cars.

The governor said the priority was restoring the economy to a high-growth path and making sure exports recovered.

India’s economy is beginning to show signs that it may be emerging from the worst global slump since World War II.

The stabilisation of international financial markets, the restoration of global credit flows and signs of revival in the advanced economies indicated domestic growth might not slow further, said Suresh Tendulkar, Prime Minister Singh’s economic adviser.

Growth expectation

“I am optimistic that growth in the current financial year will be at least as high as in the last financial year, with a resumption of a higher growth trajectory thereafter,” Tendulkar said today at the same event in Pune.

Industrial production unexpectedly rose in April, gaining 1.4 per cent from a year earlier, according to figures released on June 12. Economists were expecting a 0.1 per cent contraction.

The government’s borrowing won’t crowd out other borrowers, Subbarao said.

“I can’t say exactly whether we will increase open-market operations or we will do MSS unwinding, or something else,” Subbarao said, referring to the Market Stabilisation Scheme. “But we will manage the government borrowing programme in a non-disruptive manner.”

The government will unveil its borrowing programme in the July 6 Budget, he said.