Curb expenditure

Curb expenditure

The Reserve Bank of India has made it clear that it does not want to move way from the  hard line monetary policy it has adopted in the last few quarters to bring inflation under control. In the latest mid-quarter review it has raised the repo rate -- the rate at which it lends money to banks --by 25 basis points. It had last time raised it by 50 basis points while the general expectation was only for a moderate hike. This time too it had been felt that there would be a pause in the series of hikes – 10 in the last 15 months—but the apex bank probably thought that it should not relax its monetary vigil against inflation. It has also indicated that the high rate regime would continue and might even climb higher. The central bank might think of easing the pressure only when the inflation figure comes down to about 6 per cent. This could not be before March 2012.

This might possibly have an adverse impact on growth but the RBI has rightly decided that slower growth is not as bad as higher prices. Prices are the most important aspect of the economy for the common man and a stable price system is essential for a comfortable economic and social life. In a society where more people live below the poverty line than above it economic planners prefer a low price regime to higher growth when there is a conflicting relationship between the two. This has been the RBI’s policy too, though it has not admitted that its policy action will cause any severe slowdown of growth. The corporate sector has complained about high interest rates and investment problems. But, however well meaning the action is, the impact might be limited because the reasons for inflation are not entirely monetary.  Supply shortages and global price levels are also important factors. Even after continuous rate increases food prices are still high and manufactured goods prices have increased.

The apex bank’s monetary actions should be complemented by government policy and actions too. There is much the government can do to ease supply constraints, cut down on needless expenditure and to control input prices. Fiscal policy can be regulated in such a way that government expenditure does not add to excess demand which causes supply glitches and price increases. So, while the RBI is doing what it can, there is need for the government to do more.

DH Newsletter Privacy Policy Get top news in your inbox daily
GET IT
Comments (+)