Tarapore blasts inflation-pussyfooting, says RBI failed so far

"There is no alternative to unequivocal and unswerving policy action to tackle inflation that has now become a major structural problem. The efforts of the RBI in controlling inflation have failed so far," he told a function organised by research agency Dun & Bradstreet here over the weekend.

Warning that the Government's as well as RBI's pre- occupation with high growth at the cost of inflation will be counterproductive and disastrous, he called for "a  proactive, forward-looking monetary policy to batten down inflation and not the baby-step measures as it has been recently doing."

Stating we can't get away from the fact that inflation is all pervasive as it has become generalised, Tarapore, who played a key role during his days at RBI in monetary policy, foreign exchange regulation as well as on capital account convertibility, said, "the over 13 per cent food inflation just cannot be wished away as a supply-side problem."

"Even after a 4 percentage point slump last week, the number is intolerably high and gnaws into the vitals of large tracts of the population."

Arguing that "there is no soft monetary policy" when it comes to fighting inflation, he blasted the belief gaining currency among policymakers that it is possible to curb price rise by resorting to small, calibrated steps thus not hurting growth. "You can't slay the dragon of inflation without hurting growth," he said, quoting economist CA Yandle.

"There is an element of disenchantment with inflation targeting at RBI now. This does not mean it cannot wield a strong monetary policy to control inflation," Tarapore said.

"If the timely action is delayed and inflation rises to unacceptably high levels, the monetary policy required is very harsh, as a cold turkey approach becomes inevitable."

Stating that the most important remit of any central bank is to keep inflation low, he said, since the Reserve Bank cannot keep prices low by producing more goods, it must ensure that there isn't too much money in the system chasing too few goods.

Pointing out that the consumer price index-based inflation is the globally accepted measure of price rise, he said, "the WPI-based inflation, which we follow even now, is a poor indicator of inflation at the grassroots level," and lamented that we are yet to have a consumer price index (CPI), which can be used for policy purposes.

Quoting an NCAER study, he said as many as 40 per cent of the households account for only 14 per cent of income, but spend as much as 63 per cent of their incomes on food, leaving little for saving. On the other hand, the top 20 per ent account a vast 52 per cent of total income and bulk of savings and also 45 per cent of aggregate non-food consumption.

Warning that the biggest treat to the high growth story is the inflation spiral, he said, "given the large number of the poor in our country, a 6-7 per cent sustained growth with a 3-4 per cent inflation would be preferable to a 9 perc ent growth with a 9-10 percent inflation.

"High economic growth with high inflation is not a sustainable policy option," the eminent economist and monetary policy expert concluded.