Column : The growth-inflation trade-off in India
Central banks all over the world (India included) posit that there is a potential trade-off between growth and inflation in the sense that inflation at low levels is beneficial for growth. However, at higher levels/beyond a threshold level, inflation can be inimical to growth. In the Indian context, the threshold inflation estimated for the period 1970-71 to 1999-2000 is 5% (RBI estimates). This means that at inflation rates beyond this level, growth is impacted adversely. Alternatively, attempts to reduce inflation beyond this point would necessitate a reduction in output. However, in recent times, RBI itself has clarified that in view of the changing economic scenario and rigidities in inflation rate, the threshold inflation rate may be revised (December 2, 2012, RBI Governor).
One logical corollary of the short-run trade-off between
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