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‘India Inc getting around capacity constraints’

Former RBI Governor Bimal Jalan speaks to Gaurav Choudhury on the state of India's economy.
None | By Gaurav Choudhury
UPDATED ON MAR 23, 2007 06:49 PM IST

A high inflation rate in times of rapid growth has come as a form of bad news in good times. Concerns have also been expressed about a possible “overheating” of the economy. The government and the monetary establishment have responded to the situation through a slew of fiscal and monetary measures, including cuts in import duties, hikes in the interest rates and a ban on futures trading in certain commodities. Former RBI Governor Bimal Jalan spoke to Gaurav Choudhury on the state of the economy.


Do you think there are signs of “overheating” in the economy?

The word “overheating” does not mean that the economy is getting “burnt” or there is something seriously wrong with the economy. Overheating does not mean that the economy is going out of control. It means that there are capacity constraints in the economy vis-à-vis current demand. In any economy that is growing between eight and nine per cent for a long period of time, capacity constraints are inevitable.

Which are the areas where capacity constraints are showing up?

It is getting reflected in sectors such as steel and cement. In fact, the demand for some products is growing by about 35 per cent. This is reflected in a higher credit offtake, rising imports, money supply growth and other indicators that point towards excess demand and capacity constraints. Already companies, particularly in sectors like cement and steel, are adding capacities to match the growing demand.

What is the trade-off between inflation and growth?

There is a trade-off between a high growth rate and high inflation. Having said that, however, I would be happier with an eight per cent rate of growth and five per cent rate of inflation rather than a growth rate of 9 per cent and an inflation rate of more than 6.5 per cent.

The rate of inflation, which has crossed 6.5 per cent in recent weeks, has been a major cause of concern. When do you see the inflation rate easing and are you satisfied with the steps been taken by the government?
I am satisfied with the steps taken by the government. I would not hazard a guess on the rate of inflation, but I do believe that the rabi crop, which is expected to be good, will result in an easing of inflation from the last week of April.

Do you think the current growth rate is sustainable?

Yes. I do not see any reason why the GDP growth rate cannot be sustained. But whether it will be eight per cent or nine per cent I do not know.

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