The macro-economic management in restraining inflation comes from the experiences of countries such Brazil and US, said Subir Gokarn, RBI deputy governor, at the South Indian Chambers of Commerce and Industry meet here on Wednesday.
?Latin American countries like Brazil in 70?s and 80?s witnessed long episodes of hyper-inflation or triple digit inflation that took over a decade to taper down by the monetary policy intervention. The country experienced high inflation and low growth during those days. Similarly, post oil shock in 70?s and 80?s in US, it took a long period for Volcker to squeeze inflation out of economy by adopting appropriate policy tools on macro-economic management,? he said.
Gokarn used the United States? and Brazil experiences to drive home the point on rate tightening as the only effective tool in fighting the inflation. Underlining the hazards on tolerating inflation to high growth, Gokarn said inflation beyond 6% is uncomfortable if not in the region of dangerous threshold.
?In our assessment, inflation beyond 6% level could spiral out of control as the high number would be built into the expectations of price formation and wage formation from where it would be difficult and painful to address the situation”, he said.
Asserting that the twin deficits of fiscal and current account should be brought under the comfort levels, he added that current fiscal deficit ? 5.1% of GDP ? is due to the shift of resources from investment to consumption in the economy.
?Fiscal deficit that stood high at 10% of GDP in 2002 was driven downward to 4% of GDP in 2008 that again resurged to 5.9% last year to apparently touch 5.1% this year. There is a urgent need to tighten the subsidy bill that would enable fiscal discipline. The fiscal correction would create space for a growth-friendly interest rate regime,? he said.
