RBI governor Raghuram Rajan has floated the idea of Parliament fixing the inflation target. While this style of inflation targeting is in force in some countries like New Zealand, it will be unique for India where there is this constant debate on inflation versus growth. Dr Rajan has tried to correct this, saying he is targeting inflation and growth, not or growth, because inflation hinders growth and keeps away investment.
The RBI has been blamed for not taming inflation, imposing high interest rates and ignoring growth. Union finance minister P. Chidambaram had said in his Interim Budget speech that the RBI’s policy should be subject to the overall economic vision of the government and the RBI should target both inflation and growth as an objective in its monetary policy.
So it is logical that a world-renowned economist like Dr Rajan lobs the ball into the government’s court and says he is in favour of Parliament setting the inflation target and the RBI being given the mandate to deliver on this. This is a brilliant idea as it would bring accountability in the government to work towards the target in tandem with the RBI. At present, the RBI raises policy rates to control inflation but its efforts are rendered ineffective because of the fiscal profligacy of the government and lack of administrative efforts to release the bottlenecks that hurt manufacturing and other sectors of productivity.
