Mumbai: The former US Federal Reserve chief, Ben Bernanke, has touched on a very sensitive issue, namely the growth and inflation debate that erupts like a volcano every time inflation figures and industrial production figures are released and on the eve of every credit policy announcement by the RBI. It must have been music to the ears of the businessmen who attended a meeting addressed by Mr Bernanke in Mumbai to hear him say that “inflation targeting should not mean you should forget everything else.
Central banks should also pay some attention to growth.” He said this in answer to a query on whether inflation targeting is a good thing. Whilst agreeing that it is good and mandatory for the Fed in the US as it helps bring clarity and transparency to monetary policy, he added that emerging economies should be mindful of growth. RBI governor Raghuram Rajan is in favour of inflation targeting, which has been recommended by the RBI-appointed Urjit Patel Committee. He is of the view that there can be no growth unless inflation is controlled and believes that if inflation is controlled, growth will follow.
He is obviously clear that the two are not mutually exclusive.
This growth/inflation conundrum, however, continues to be a contentious issue with even the BJP, which is widely expected to come to power at the Centre, saying the RBI should cut interest rates as high interest rates are hampering investment.
While the business community forms an important constituency for the BJP, particularly in the ongoing elections, it is hoped that the BJP respects the autonomy of the RBI. Besides, there is always room for discussion and RBI governors have traditionally met the respective finance ministers on the eve of credit policy announcements.
Worldwide, the autonomy of the central bank is respected and guarded and, as Mr Bernanke told his audience, as the Indian economy matures, an independent and responsible central bank is really central to its success. Mr Bernanke has also during his regime faced criticism from various quarters for his loose monetary policy.
There were many who felt that his pumping $80 billion every month into the banking system was leading to bubbles in the real estate and commodity markets. But, as he said, he was lucky he had the support of Presidents, George W. Bush and Barack Obama, during his tenure. Since this growth/inflation issue won’t vanish in a hurry, maybe the RBI should bring out a paper on how lowering interest will not help growth in the long run.
A serious debate is needed on this issue.
