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No black and white answers in economics, Basu on inflation

business Updated: Sep 14, 2011 20:58 IST

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Terming near double-digit inflation as "uncomfortable", chief economic adviser Kaushik Basu on Wednesday said there is no black and white answer in economics and RBI will have to balance containing price rise and promoting growth at its review of credit policy on Friday.

"There is no black and white answer... RBI will have to balance out these two -- controlling inflation and not dampening growth too much," Base who is chief economic adviser to the finance ministry said.

He said inflation is likely to remain elevated till end of the calender year and only start moderating after December.

"I do expect December inflation to be a fairly reasonable decline. But till then it will remain choppy," he said.

His comments came after inflation climbed to 13-month high of 9.78 per cent in August, from 9.22 per cent in July, on the back of expensive food and manufactured items.

The Reserve Bank of India (RBI) has already hiked its key-policy rates 11 times since March, 2010 to curb demand side inflation. It is scheduled to announce its mid-quarterly review of credit policy on September 16.

Department of Economic Affairs Secretary R Gopalan said the RBI's monetary tightening had had only a limited success. The central bank has to "change from being accommodative to one of aggressively combating inflation", he added.

"The benchmark short-term policy rate was raised in quick succession from March, 2010. While this tightening has been able to anchor inflationary expectation up to a point it has had limited success in lowering inflation rates to acceptable levels," Gopalan said.

This is also the ninth consecutive month when inflation has remained above the 9 per cent mark.

While the sustained inflation is likely to put pressure on the central bank to continue with its tight monetary policy, there is concern on the growth front.

Industrial production fell to a 21-month low of 3.3 per cent in July. Besides, GDP growth also moderated to 7.7 per cent in April-June period, the lowest in six quarters.

India Inc and experts have blamed the high interest rates for increasing the cost of borrowing and said this has put pressure on fresh investments and hindered growth.

Most economists, however, said that as inflation remain at an elevated level the central bank is likely to go for another rate hike at its mid-quarterly review of credit policy on September 16.

"No doubt the RBI is in a dilemma but inflation control remain its prime agenda and so we expect it to go for another hike of 25 basis points on September 16," Crisil Chief Economist D K Joshi said.