New Delhi, Apr 6: The current inflation has been a supply side driven phenomenon which needs to be dealt with cautiously so as to not sacrifice growth over price stability, according to a study by an industry body.
While it appreciates the tight position of RBI in dealing with Growth versus stability, any monetary measures that are aimed at controlling inflation should be judiciously employed so as to not sacrifice growth, it added. The study by industry body CII notes that the economy is currently facing twin problems of an emerging slowdown and moderately high rate of inflation especially in food grains, basic metals, metals and metal products.
The Index of Industrial Production (IIP) has moderated during the first 11 months of the current fiscal year and the IIP is expected to further decline in terms of growth to end the year with lower growth of industrial production, it said.
In this scenario, CII submits that the signalling of RBI on its stance on the monetary policy measures would be of pivotal importance.
According to the industry body there are three options for RBI in terms of signalling, namely, increase interest rate and indicate that inflation is out of control and growth can be sacrificed to control inflation.
Maintain status quo and allow the fiscal measures to contain inflation, while signalling that it has the economy under control, and this will also help manage inflationary expectations.
It has also suggested to reduce interest rate and indicate that it is pro-growth even in a situation of moderately high inflation.
This stance must be backed by fiscal measures, it added.
The body is of the opinion that the RBI should opt for either the second or third option. However it does not see any indications of heating up in the economy. With liquidity conditions under control, the challenge for RBI will be to manage inflationary expectations.
It is also of the strong view that restricting demand to manage supply side constraints will not augur well for growth. The recent fiscal measures to enhance supply of Rice and Edible Oil will faster than a macro measure such as interest rates, though interest rates are the best tool adopted by central bankers across the world to contain inflation.
The current inflation witnessed especially in commodities like rice and pulses has been due to shortfall of rice upto 4 million metric tonnes and pulses upto 2 million metric tonnes.
In these cases, fiscal measures such as reducing customs duty for a short period on rice from the current level of 70 per cent to NIL and that of extension of NIL customs duty on pulses until prices stabilise, will help bridge the gap in demand and supply.
A similar move can also be attempted on the Basic Metals and Metal and Metal products to contain further increase in prices.
The RBI can keep a close watch on the price situation post the fiscal measures and then resort to any monetary measures, CII added.
With global economic conditions worsening along with increasing price trend of commodities globally, any move that will choke investments in the economy will add to the declining IIP and prolong a turnaround.
Hence it can send a strong signal that interest rates will be cut to stimulate investments and growth or in a worst-case scenario, maintain status quo on monetary measures.
This signalling is very important at this juncture to stimulate growth through investment expansion, the study added.