The country is in a position to grow at 7.5-8 per cent this year and inflation is being brought under control, according to Dr. C. Rangarajan.
In a conversation with The Hindu , Dr. Rangarajan, who was formerly the Reserve Bank of India (RBI) Governor and the Chairman of the Prime Minister’s Economic Advisory Council, said, “Indications are inflation is coming under control.”
“I would urge that we need to move inflation to a lower level,” he added.
Dr. Rangarajan was referring to the RBI’s January 2016 target of 6 per cent for inflation (measured by the Consumer Price Index or CPI). June 2015 figures had CPI at 5.4 6 per cent. Dr. Rangarajan said a desirable January target would be an inflation of 5.5 6 per cent, for example.
Arguing that food inflation was the only component responsible for the relatively high levels of headline inflation, which is a measure of overall inflation including volatile food and energy prices, Dr. Rangarajan said there was every indication that manufacturing inflation would stay low because there was considerable potential for industrial production in addition to low crude oil prices. If the monsoons turned out to be reasonably good, food inflation would also come down, he said.
Responding to a question on how India might best act in a time when global trade was sluggish (barring a boost in 2010, global trade has dropped after the financial crisis of 2008), Dr. Rangarajan said exports had fallen since last year because of a decline in petroleum, but the figures for non-petroleum exports were better. “India has a very low share in the total world exports, and, therefore, the possibility of India doing well despite the world trade growth not being too strong not be ruled out. Since the share is so low, it [India] can increase its share even if world trade is moving slowly.”
``Much of what happens depended on the economic situation in the European Union (EU), whose member-countries now seem to be in an accommodative mood about Greece,’’ according to Dr. Rangarajan. He also added that the U.S had already demonstrated that its economy was doing better than last year and the Chinese slowdown was not as bad as expected. “Therefore, I believe, that while the world economy may not be picking up steam, it may not necessarily deteriorate,” he said.
On the monetisation of gold, Dr. Rangarajan said such a scheme had been introduced.
However, he said one should not expect too much from it, owing to the sentimental attachment to gold and also the reluctance of holders of gold bars to deposit such gold with public institutions because they might have to explain where the gold came from.
“That is really a serious problem. I think in the absence of some kind of amnesty, it may be very difficult to get that type of gold into the hands of public institutions but amnesty runs into a lot of problems. It may not go well with our own ideas of what ought to be done,” he said.
When asked for his views on RBI Governor Raghuram Rajan’s comments at the London Business School in June that the world’s central banks needed to define the ‘rules of the game’ to prevent the external ill-effects of a given country’s monetary policy, Dr. Rangarajan said, “Now as a general proposition, it is valid to say that large economies, when they take decisions, even on domestic matters, must also keep in view the fall-out there can be on the developing economies…but in the current case, I will not blame the developed countries.”
Industrial countries, especially the U.S Federal Reserve and European Central Bank, have been accused of using unconventional quantitative easing techniques (that is, increasing the amount of money available in the economy), and this has had exchange rate effects, leading to competitive depreciation.
It would be difficult to define a set of rules for monetary policy in the context of global effects, apart from central banks understanding that their monetary policy had extra-territorial effects, Dr. Rangarajan said.
On the overall outlook for the economy, Dr. Rangarajan said, “Well, the Indian economy will do better than last year… if the monsoon turns out to be reasonably good, we can expect a growth rate of between 7.5 per cent and 8.06 per cent,” adding, “but we really need much higher growth in order to set in motion a virtuous cycle of high growth and high investment.”
