Inflation a major problem for Indian economy: Mukherjee

Washington, June 28: Finance Minister Pranab Mukherjee on Monday said inflation poses a major challenge to the Indian economy and projected that the rate of inflation is going to be more than 6.5 per cent this year.

"There are problems (with the Indian economy) and one of the major problems is inflation," Mukherjee said, addressing a meeting of India and American corporate leaders, think-tank members and policymakers at a conference on the ''US-India Economic and Financial Partnership'' jointly organised by the Confederation of Indian Industry (CII) and Brookings Institute, a Washington-based think-tank.

"Inflationary pressure is putting a serious constraint," said the Finance Minister, who arrived in Washington on Monday leading a high-powered Indian delegation for the second India-US Economic and Financial Partnership discussions being held here.

"We do not believe, in theory, one is to be dispensed for the other. Yes, we can have a moderate rate of inflation and at the same time, reasonable developed growth. The monetary and fiscal policy must move in tandem. In India, we are doing so," he said.

"Therefore, in short term, I would like to emphasis that in India, the growth potential is there. The rate of saving and rate of investment is reasonably high. The various structural reforms which we have undertaken and which will come in course of time, that will ensure that investment-friendly environment which can attract investment from various parts of the world," he said.

Referring to concerns being expressed by various quarters about undesirable blips in economic data from time to time, Mukherjee said, "Sometimes questions have been raised, particularly looking at a figure in a short campus of time.

(For example) Whether FII in the current financial year is slowing down. In every year, the first quarter's FII investment slows down, particularly the equity. But in the later part of the years, it makes up. This is not in one year, but year after year. Therefore, we need not be unnecessarily overly worried."

Inflation, Mukherjee reiterated, is an important constraint to India's economic growth, which the government has to tackle.

"To be very frank, what shall be acceptable and what can be a tolerable level of inflation is very difficult to define. But in our economy, we feel that if we can keep the inflationary pressure within 5 to 6 per cent, it could be ideal, but we can live with 6 to 6.5 per cent," he said.

"This year I do hope it will be a little more, not because of near supply constraints on the agricultural front, which was one of the major reasons for inflationary pressure of the previous and current year, which we have substantially addressed by taking appropriate measures," he said.

"But the international commodity prices, including food and fuel, is causing severe constraints," he said.

"The food prices have started coming down. We have taken steps very recently. And have reduced subsidy burden by adjusting the price of oil and also providing relief to the consumers by doing away with central taxes and appealing to provincial governments to reduce their taxes on petroleum and petroleum products. I do have hope that it will have some impact. But this is going to be a major problem and it would have its impact on the overall growth scenario," Mukherjee said.

PTI