If inflation slides below 8%, the Reserve Bank of India (RBI) need not tighten money in its next policy review on November 2, said Prime Minister?s Economic Advisory Council (PMEAC) chairman C Rangarajan. ?A further round of rate increase may be called for if inflation still remains at about 8% during November policy review,? said Rangarajan. Although there were signs of inflation rate coming down, the level of inflation was still high, he said in an interview.
To contain inflation, it was necessary to manage pressures on demand as well as supply side. Inflation in August was 8.63%, which meant that inflation was higher than 8% mark warranting monetary action in the next RBI policy review. ?The need to contain demand-side pressure calls for monetary action,? said Rangarajan.
?Monetary policy has a role to play even when the inflation is triggered by high food prices because if food inflation persists for some time it gets generalised and affects headline inflation,? he said. Good monsoon rains and prospects of improved food grain output will help in meeting increased demand in the economy and also cool overall inflation to 6.5% by December-end and 5.5% by March. There will be a marginal increase in food grain production and also substantial improvement in pulses and cotton output this year, he said.
?So, the overall agricultural production will be good,? he added. Recent high inflation could be viewed as a partial outcome of government?s inclusive growth policies such as programmes that guarantee employment for 100 days a year to people living below the poverty line. Such programmes had boosted demand for wage goods. ?Obviously if income level goes up, it will generate demand pressure,? Rangarajan said. ?It is necessary to increase supply,? he said.
Recent developments in the economy bring out the need to sustain annual agriculture growth at 4% this year. When incomes start rising, demand for food grain and other food products will go up, he said. Therefore, sustaining a high annual agriculture growth of 4% becomes extremely necessary. Rangarajan said financial inclusion meant weaker sections and lower income groups were being brought into the ambit of the organised financial system. This was essential for the economic uplift of the society, he said.
Surging global wheat prices won?t lead to higher food inflation as the country neither exports nor imports the food grain, prime minister?s chief economic advisor said. ?We are not allowing export of wheat now. So a question of link between international price and domestic price therefore does not arise,? he said. Also, ?if we were in a situation in which we had to import, then the impact of international prices will be felt on Indian economy. Fortunately, we are not in that situation now,? Rangarajan said. Russia, which is the largest wheat exporter, is facing its worst drought in 50 years. As a result, Russia?s wheat output is likely to be 41.5 million tonne in the year to Jun 2011 compared with 61.7 million tonne in the previous year.