The growth versus inflation debate has been clouded by some oversimplifications, feels RBI Governor

The raging — though implicit and academic — debate over growth and inflation came to the fore yet again on Saturday with Prime Minister Manmohan Singh suggesting the need for fresh thinking on the Reserve Bank’s monetary policy in a globalised economy and dealing with its macro-economic policy constraints, its targets and instruments.

In his remarks after releasing ‘RBI History — Looking Back and Looking Ahead’, the fourth volume of the apex bank’s 78-year-old history at a function at his Race Course Road residence here, Dr. Singh favoured revisit of the possibilities and limitations of the monetary policy in a globalised and fiscally-constrained economy.

“And I would venture to think that the time has come, when we should revisit some of those areas — the possibilities and limitations of monetary policy in a globalised economy, in a fiscally constrained economy — I think that is one subject. But macro-economic policy-making, targets and instruments, I think, is another area, where I feel fresh thinking is called for, and I sincerely hope that the governors of the future, particularly Dr. Raghuram Rajan, will attempt to revisit some of these difficult areas,” the Prime Minister said.

The remarks by the Prime Minister, who himself had served as RBI Governor during 1982-85, assume significance in the light of the recent apparent tussle between the apex bank and the Finance Ministry, which made it clear that the government, with its priority on promoting growth, was not on the same page with the central bank’s hawkish policy stance on checking inflation.

Apart from RBI Governor D. Subbarao, who demits office on September 4, and Governor-designate Raghuram Rajan, who is to take over the next day, attending the function, among others, were former governors of the central bank — Amitabha Ghosh, C. Rangarajan, Bimal Jalan, Y. V. Reddy — current and former deputy governors and Ministers of State for Finance Namo Narain Meena and J. D. Seelam. Finance Minister P. Chidambaram could not attend the event as he was on a visit to Tamil Nadu.

‘Best is yet to come’

Lauding Dr. Subbarao for serving the country and the apex bank well, the Prime Minister said the RBI had done the country proud in shaping the monetary and credit policies and also influencing the line of credit in rural areas. “The RBI has served the country with distinction. But I would say the best is yet to come,” the Prime Minister said.

Noting that a degree of national consensus was required if the government had to “carry out social and economic change in a country as large, as diverse and as complex as India is,” Dr. Singh hoped that Dr. Rajan would build on his predecessor's work to chart a new course of action in the very difficult period of economy now.

“I think Raghuram Rajan (Governor-designate) will evolve a policy with the help of professional persons for a national consensus if we have to carry on with implementing social and economic changes in a complex economy… Dr. Rajan is a distinguished economist of world repute and I wish him all the best in RBI under his leadership…in him we have a very distinguished economist of international fame. I sincerely hope that the RBI will see a more glorious period under his governorship,” he said.

The important debate

In his welcome speech, Dr. Subbarao dubbed as ‘inaccurate and unfair’ the contention that the RBI was “obsessed with inflation, oblivious to growth concerns”, an issue over which the first and possibly the most important debate was about balancing between growth and inflation in the policy context.

“This is a balance that both governments and central banks struggle with. In my view, this debate has been clouded by some oversimplifications. One such oversimplification is to say that governments are for growth and central banks are for price stability. Another oversimplification is to assert that there is a tension between growth and inflation, and that one necessarily has to play the trade-off between growth and inflation in policy making,” he said.

Maintaining that the RBI’s monetary policy aimed at three objectives — price stability, growth and financial stability — Dr. Subbarao said: “The Reserve Bank is committed to inflation control, not because it does not care for growth, but because it does care for growth. There is any amount of evidence to show that an evidence to show that an environment of low and stable inflation is a necessary precondition for sustainable growth.’’

“How history will evaluate the Reserve Bank on its balanced commitment to growth and inflation is an interesting conjecture,’’ the outgoing Governor said.

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