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Finance Minister (FM) Nirmala Sitharaman on Friday said taming inflation was absolutely critical to economic growth, stressing that an over-reliance 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 CII B20 Summit INDIA 2023, 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.
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.
The minutes of the August review released on Thursday stated that the monetary policy committee decided to wait and watch the evolution of headline inflation. “The RBI needs to be ready to pre-empt any second-round impact of food price shocks on the broader inflationary pressures and risks to anchoring of inflation expectations,” the minutes quoted RBI Governor Shaktikanta Das as saying.
The FM said the central bank, in today’s context, would have to keep in mind growth and growth-related priorities to control inflation. “The tendency to use interest rates as the only solution for dealing with inflation has its own downside…The fiscal deficit also needs to be restrained. Otherwise, inflation is not going to be defeated or brought under control,” Sitharaman said.
Stressing the need for diversification of supply chains, the FM said the world cannot afford another disruption in supply chains in the next 50-60 years. “One more disruption to the supply chains will be ruinous…Putting all the eggs in one basket is not going to help for the safety of everybody.”
She said green shoots of a private capital expenditure upcycle could palpably be felt by most of the observers, referring to the increased provision for capital expenditure crowding in private investments.
Sitharaman highlighted that capital outlay in the Budget went up by about 33 per cent in 2023-24, and the share of capital expenditure in total expenditure increased to 22.4 per cent from 12.3 per cent in 2018.
“The government has incentivised states to increase their capital spending. State capital expenditure has increased by 74.3 per cent year-on-year in the first quarter one of FY24. Centre’s capital expenditure increased by 59.1 per cent for the same quarter.”
Sitharaman talked about the need to invest in public health and education, as well as climate change finance. “No individual country can sufficiently do enough for the global shortcomings. It has to be everybody on their own and equally, everybody contributing for the whole,” she said.
Responding to a Reuters report about the government working on a new electric vehicle policy to cut import tax if the makers build locally, Sitharaman told reporters “there is no proposal in front of me”.
While mentioning about the key priorities of the government, Sitharaman said the focus was on Aatmanirbhar Bharat (self-reliant India) but essential imports would not be stopped.
On the free trade agreement (FTA) with the UK, the FM said the speed with which the work was going on gave hope that the agreement should conclude this year. “Brexit has happened but you can play the role of a threshold towards Europe, Nordic, and EFTA countries. One FTA can spill over the second FTA for both countries,” she said in response to a question by British businessman Karan Bilimoria.
She also stressed the need to increase labour force participation rates and create enabling policies for the same.
Sitharaman said the foreign direct investment and foreign capital flows were vital to India’s growth story, and simplification and rationalisation of foreign portfolio investors regulations were going through reforms. “Increase in aggregate foreign investment limits are also being looked into,” the FM said.
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