Key advisor to the Finance Ministry Kaushik Basu on Friday supported the small measures taken by the Reserve Bank of India to control inflation, saying that the aggressive steps would have led to stunted growth and increased unemployment.
Saying that excessive tightening may lower price rise, Chief Economic Advisor Mr. Basu told reporters here that the inflation numbers were giving confused signals. He, however, stuck to the Finance Ministry's estimate of 6 per cent rate of price rise by year-end, even with the new revised series.
“An excessively sharp curb on these policy variables (monetary tools among others) will lower inflation, but at the cost of slower growth and more, worryingly, higher unemployment,” he said.
The Chief Economic Advisor said unemployment was bad in itself and not just because of political repercussions.
“The unemployment situation going bad is bad in itself. The political process is not as sensitive to it, but morally it should be,” he said, adding that “unemployment generally affects a comparatively smaller section in a severe manner unlike inflation which impacts everybody.”
“Just because we do not get regular data on unemployment, we cannot be cavalier about it and let unemployment rise,” Mr. Basu said.
Meanwhile, Finance Ministry officials quoted a survey released by the Labour Ministry that shows employment rose to 10.66 lakh in eight sectors — textile, metals, leather, gems and jewellery, auto, IT/BPO, transport and handloom/powerloom — as on March 2010 compared to a year ago.
The RBI had on Thursday raised short-term lending (repo) by 25 basis points to 6 per cent and short-term borrowing (reverse repo) by 50 basis points to tame inflation, which stood at 8.5 per cent in August.
Instead of taking one big step, the RBI has been raising the rates and other tools in phases. It has raised both the rates five times this year, while the Cash Reserve Ratio (CRR), which is a requirement for banks to keep portion of deposits with the central bank, was hiked three times. CRR was not raised on Thursday. On whether inflation has actually abated, Mr. Basu said inflation figures over the last three weeks hade been mixed, giving rise to confused signals.
“And in case, you did not find these confusing enough, we in government decided to throw in our bit by switching over to a new Wholesale Price Index this month,” he quipped.
To a query on his projections for inflation by the year end under the new series, he said,” I would remain with that (6 per cent by year end).”
“After a long period of fairly steady downward movement in the food price index, the last three weeks saw small but nevertheless positive increases in the index — this is true by the old and the new index. This I do not like,” Mr. Basu said.
“Food price inflation under the new index is substantially higher than the old index (week on week). So, which one should you trust? I wish I could say the old index, which gives a lower inflation. But, the truth is that the new index gives a more accurate picture of inflation,” he added.
However, if taken on month-to-month basis, food inflation falls in August compared to July in new series, while it rose under the old series. Mr. Basu, however, commended the government for tackling inflation.
“Despite this mixed performance on inflation, I do give government high marks for its navigation through this difficult problem,” Mr. Basu said. Mr. Basu said there was no known formula as to what the different monetary tools should be as well as how much the fiscal and revenue deficits, for pulling down inflation to a desired level.
