By Aditya Raj Das / New Delhi
Finance Minister Nirmala Sitharaman today stressed that taming inflation was absolutely critical to economic growth. She said that an over-dependence on interest rates as the only tool to fight the price rise, without managing the supply side factors, would not provide a complete solution.
Speaking at the B20 Summit INDIA 2023 organised by the CII here, Sitharaman said a persistent high inflation would weaken demand, and elevated interest rates for a considerable time could come in the way of economic recovery.
Finance Minister said, the government’s priority is to tame inflation to ensure sustained economic growth. She said, Central banks will have to keep in mind growth-related priorities. She said, fiscal deficit needs to be restrained otherwise inflation will not be brought under control. Mrs Sitharaman also said, financing climate is a key factor for sustaining global economic recovery.
Retail inflation surged to a 15-month high at 7.44 per cent in July on the back of skyrocketing food prices. In its latest monetary policy review, the Reserve Bank of India (RBI) revised upward its inflation forecasts to 6.2 per cent for the September quarter and 5.4 per cent for FY24, while keeping the policy rate unchanged at 6.5 per cent.
While mentioning about the key priorities of the government, Sitharaman also stressed that the focus is on Aatmanirbhar Bharat (self-reliant India) but essential imports will not be stopped.
She also emphasised on the need for diversification of supply chains at the earliest to avoid shocks.
Noting that India is the fastest growing major economy, she said that in another few days, the GDP numbers for the first quarter of 2023-24 will be released.
“As things stand, nobody has a clue. But everybody feels that yes, the first quarter did go on well, so the numbers should be good,” Sitharaman said
The National Statistical Office (NSO) is scheduled to release the Gross Domestic Product (GDP) data for April-June quarter on August 31.
She said there is a lot of interest on what the US Federal Reserve is going to say from Jackson Hole.
“All of us are wondering how that is going to come out because its spill over is also something which we notice,” she said.
Investors are awaiting cues on the US Federal Reserve’s monetary policy from Chairman Jerome Powell’s speech at the Jackson Hole Symposium on Friday.
According to her, the key priority for economic growth “is taming inflation” because persistently high inflation will weaken demand.
“It’s basic economics. I’m not saying anything new. Equally, elevated interest rates for considerable time can come in the way of economic recovery,” the finance minister said and added that the tendency to use interest rates as the only solution for dealing with inflation has its own downside.
“And most economies do have this problem, because I think, for want of a better word, obsession with using interest rate as the only tool to deal with inflation and not manage the supply side factors will not give a complete solution for inflation.
“Temporarily it can give but sooner the supply side issues can creep the ugly heads up,” she said.
Most of the central banks, including the Reserve Bank of India (RBI), have raised interest rates to tackle inflation following the outbreak of Russia-Ukraine war in February last year that has also disrupted global supply chains.
“… task for the central banks therefore… particularly in today’s context is to keep in mind growth and growth-related priorities even as equally looking at controlling inflation,” Sitharaman said.
She also said that India has showcased an accelerated pace of economic reforms in the last nine years of Prime Minister Narendra Modi-led government.
“Reforms have been continuing, wide ranging domains have been covered, whether it is fiscal, whether it is digital, whether it is physical infrastructure or social inclusion, you spoke about inclusion, yes on social inclusion as well.
“So, all these have positioned India on a higher and sustainable growth path,” she added.
Further, Sitharaman said captial expenditure by both the centre and states have gone up.
“I’m happy to say this enhanced provision for capital expenditure by the government is now crowding in private investment. So the green shoots of a private capital expenditure upcycle can be palpably felt by most of the observers,” the minister said.
Observing that foreign capital is vital for growth, she said the simplification and rationalisation of foreign portfolio investors regulations are being done.