The meeting, which took stock of the overall price scenario, was also attended by RBI Governor D Subbarao.
Significantly, the IMG agreed with the RBI’s assessment that over the long run, high inflation may curb growth and harm investment by creating uncertainty. “The RBI’s assessment of short-term and long term inflation situation was presented before the IMG,” Subbarao told reporters after the meeting. The meeting was also attended by secretaries from key economic ministries like finance, commerce and agriculture.
Making a presentation on overall inflation the RBI Governor noted that with both headline and core inflation remained significantly above the projections and the comfort level, there are concerns about inflationary expectations becoming unhinged. He stressed containing inflation is imperative to sustaining growth over the medium-term. Analyzing the impact of high inflation on economy Basu while agreeing with RBI Chief said “in the long run there is no conflict between the objectives of high growth and low inflation. In the short run, lowering inflation can have a dampening effect on growth, as the traditional Philips curve analysis suggests.”
“But this is desirable, if our aim is to achieve high, sustainable growth,” Basu said. The meet stressed the need to take into account basic structural factors to combat inflationary pressure.These include the impact of diversification of consumption baskets on demand and prices of proteins, fruits and vegetables. The meeting suggested for quick response to address supply constrains as noticed in agriculture. In this context it stressed the imperative to translate the 2011-12 budget initiatives on improving agro infrastructure into “concrete actions”.
Besides food, the contribution of infrastructure bottlenecks and human capital imbalances to structural inflation has to be taken note of.
