Tuesday, January 30, 2007

On tackling inflation

  • I recommend reading today’s debate in ‘Perspectives’ in ET. Do so here.
  • I would also recommend reading the full text of tomorrow’s RBI credit policy review.
  • Three experts have propounded their views on this. I will excerpt significant points from each of these views.
  • Omkar Goswami, Chairman, CERG Advisory
    • The current inflation is structural and driven by the supply side – a milieu in which restrictive monetary policy tends to have relatively little traction. By restrictive monetary policy, he is referring to the expected RBI’s hiking of repo and reverse repo rates and a possible hike in CRR.
    • Such measures could trigger a slowdown in corporate growth rates, and with it manufacturing and perhaps even services. Combating this bout of inflation needs other measures: slashing customs duties, eliminating non-tariff barriers (read quota restrictions), and controlling certain items of government consumption expenditure. But that requires close collegial coordination between the RBI and the finance and commerce ministries.
  • Bidisha Ganguly, Chief Economist, BRICS Securities
    • A combination of demand-side and supply-side phenomena has led to the present spike in inflation.
    • Monetary tightening by the RBI is unlikely to have any impact on prices of primary products like foodgrains, fruits and vegetables and oilseeds.
    • Given the lags with which monetary policy tends to work, central banks in a tightening mode always face the risk of pushing the economy into a recessionary phase.
  • Ajit Ranade, Group Chief Economist, Aditya Birla Group
    • Inflation today is a global problem, and most central banks are still not done with hiking interest rates.
    • There are basically four well known responses to tackling inflation. These are through monetary, fiscal, trade and exchange rate policy.
    • Back in 1965 as the border conflict escalated, and shortages, expenditures and inflation shot up, Prime Minister Lal Bahadur Shastri appealed to his countrymen to give up one meal a wekk in the service of the nation.
  • The experts seem to be unanimous in holding that restrictive monetary measures from RBI will probably adversely effect the growth in the economy and also possibly push it into a recessionary phase. Let us await tomorrow’s RBI policy statement and try to learn how the RBI tackles inflation.