Top Indian economic panel urges stern action on inflation

NEW DEHLI: An influential Indian economic advisory panel pushed Friday for the central bank to act decisively against double-digit inflation, insisting the economy could grow strongly even with rate hikes.

Prime Minister Manmohan Singh’s Economic Advisory Council warned that India’s inflation rate of more than 10 per cent was twice “the comfort level” and could hurt economic growth in the medium-term.

“Further tightening is required,” council chairman C Rangarajan said, days before a meeting Tuesday in Mumbai of India’s central bankers who are widely expected to raise leading short-term interest rates.

Even if the Reserve Bank of India does not take aggressive monetary action against inflation at its policy meeting Tuesday, it can opt for a series of “baby steps,” Rangarajan said.

His comments came as he gave the council’s economic outlook for the current fiscal year to March 2011.

The Congress government has expressed concern that too rapid monetary tightening could derail the rebounding Indian economy.

But Rangarajan insisted that Asia’s third-largest economy can expand by 8.5 per cent this year and nine per cent next year even with rate hikes to tame inflation.

India’s central bank has already raised interest rates three times this year but inflation has remained stubbornly high and stands at 10.55 per cent, the highest among the Group of 20 leading nations.

The central bank is expected to raise rates by a quarter point on Tuesday.

Inflation was stoked by high food prices as a result of last year’s drought – the worst in nearly four decades – but the problem now has spilled into the wider economy.

Rangarajan said the economy, which logged 8.6 per cent expansion in the last financial quarter, “clearly shows a strong economic recovery.”

With inflation “more than twice the comfort zone, it is important that monetary policy completes the exit process” from earlier big rate cuts aimed at shielding India’s economy from the global financial crisis, he said.

Rangarajan forecast that inflation would start coming down in coming months to reach seven or eight per cent by December. He said he expected inflation to be 6.5 per cent by the end of the fiscal year in March 2011.

Published in The Express Tribune, July 24th, 2010.