The Reserve Bank of India (RBI) rejects the notion that high inflation is the "new normal" noting that many of the supply-driven causes of the inflation in India can be corrected by appropriate policies, RBI governor Duvvuri Subbarao said on Friday.
"Accepting a new normal for inflation not only has no theoretical or empirical support, but entails the moral hazard of policy inaction in dealing with supply constraints," Mr Subbarao said in the text of a speech to bankers in New Delhi on Friday, a copy of which was made available to journalists
India's headline inflation remained above 7 per cent for the last three years before falling to 6.6 per cent in January and the central bank, considered a global outlier for keeping interest rates high despite slowing economic growth, only resumed cutting rates in January after a gap of nine months.
Some economists have argued that the central bank should adjust its policies towards an acceptance of persistently higher inflation.
"The 'new normal' argument ... is that it will be politically difficult to reverse these entitlement programmes, they are here to stay, and that India should accept wage-price pressures as a structural feature and adjust its inflation goal accordingly," the RBI governor said.
He said high growth in wages is not sustainable in the absence of improved productivity.
"We must recognize that the government does not have the fiscal capacity to continue entitlements and welfare programmes at this level. The government's embrace (of) fiscal responsibility will act as a self-limiting check on the wage-price spiral," he said.
India is on track to trim its fiscal deficit to 5.2 per cent of GDP in the current fiscal year, a narrowing that several months ago seemed unlikely, and hopes to cut that further to 4.8 per cent of GDP in the fiscal year that starts in April.
Copyright @ Thomson Reuters 2013
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