Jan. 24 (Bloomberg) -- Indian Finance Minister Palaniappan Chidambaram said the central bank must keep the objective of supporting growth in Asia’s third-biggest economy, a challenge to implementing a proposed shift to an inflation target.
A Reserve Bank of India panel this week recommended making inflation the “predominant objective” of monetary policy. It proposed adopting a 4 percent target for consumer-price gains with a band of plus or minus two percentage points by 2016, a figure Chidambaram called “ambitious.” Consumer prices rose 9.87 percent in December from a year earlier.
“Inflation targeting is only one among the objectives,” Chidambaram said in an interview yesterday in Davos, where he is attending the World Economic Forum meetings. “Another objective of the RBI must be to support growth.”
Differing opinions over how best to tackle Asia’s fastest inflation signal a lengthy debate that won’t be settled before a new government takes office following elections due by May. Economic growth of 5 percent in the last fiscal year, the slowest expansion in a decade, has sapped support for Prime Minister Manmohan Singh’s ruling Congress Party as it trails in opinion polls.
“Moving on to a formal glided target path on inflation will need overall support of the government,” said Samiran Chakraborty, a Mumbai-based economist at Standard Chartered Plc. “As of now, we have not heard anything from the government which would suggest that they are willing to accept that immediately.”
The RBI committee said that the inflation target should be reached in a manner consistent with sustainable growth and financial stability. The government will have a say in any final decision on monetary policy, said Chidambaram, who called it a “laudable objective” to work toward inflation targeting.
RBI Governor Raghuram Rajan yesterday called inflation a “destructive disease,” according to a report in Press Trust of India. He said inflation is hurting economic growth in the long run, the report said, citing a speech organized by the Research and Analysis Wing, India’s foreign intelligence agency.
“We can’t push inflation under the carpet as a central banker,” Rajan said, according to the PTI report. “We have to deal with it.”
Singh’s policies to boost rural wages and distribute cheap food have contributed to consumer price inflation of more than 9 percent for about two years. Consumer prices rose 9.87 percent in December from a year earlier, compared with 11.16 percent in November and the fastest pace in a basket of 17 Asia-Pacific economies tracked by Bloomberg.
Chidambaram called the December figures “very encouraging” before Rajan reviews the benchmark rate next week.
Rajan surprised economists last month by holding the benchmark repurchase rate at 7.75 percent. He will leave the rate unchanged at the next meeting on Jan. 28, according to 25 of 28 economists in a Bloomberg News survey. Three predict a quarter-point move to 8 percent.
Chidambaram said the government plans to retain curbs on gold imports into the next financial year beginning April 1 to curtail a record current-account deficit. India’s gold purchases slumped after the government increased the tax on imports three times in 2013 to 10 percent, linked shipments to re-exports and tightened financing rules.
“Since every ounce of gold is imported, we must restrain our demand or appetite for gold,” Chidambaram said. Curbs will continue for “as long as necessary” until “we get complete grip on the current account deficit,” he said.
The rupee, which has fallen about 13 percent in the past year, pared losses after Chidambaram’s comments on gold imports yesterday. It fell 0.3 percent to 62.13 per dollar at 9:20 a.m. in Mumbai. The S&P BSE Sensex lost 0.4 percent. The yield on the 10-year bond rose to 8.70 percent from 8.67 percent yesterday.
The current account gap will narrow to about $56 billion this fiscal year from $88 billion in 2012-2013, the RBI estimates. The current account is the broadest measure of trade, tracking goods, services and investment income.
The government expects to meet its fiscal deficit target of 4.8 percent of gross domestic product in the financial year ending March 31, Chidambaram said, the narrowest fiscal shortfall in six years. The central bank panel proposed the government reduce its budget deficit to 3 percent of gross domestic product by March 2017, a target Chidambaram shares.
The Congress Party is set for its worst election performance since India’s independence in 1947. The main opposition Bharatiya Janata Party will win 188 seats in the 545-member lower house, while Congress will win 91 seats, according to a C-Voter poll for India Today published late yesterday.
Singh’s government, beset by a series of graft scandals, has struggled to revive the economy since a 2012 policy overhaul that included allowing foreign investment in the multi-brand retail and aviation sectors. India’s credit rating may be cut to junk in 2014 unless the general election leads to a government capable of reviving economic growth, Standard & Poor’s said in November.
“There is absolutely no case for downgrading India and I have no fear at all that we will be downgraded,” Chidambaram said. “The investors I have met have no fear that India will be downgraded.”
Chidambaram said economic growth is accelerating, and India will achieve its potential expansion rate of 8 percent in three years. The RBI expects India’s economy to expand 5 percent in the year ending March, the same as the previous year, which was the weakest pace in a decade.
“Whether we do 5 percent this year or slightly less or slightly more is an event no doubt,” Chidambaram said. “But it’s really a stepping stone to achieving a 6 percent growth rate in calendar 2014.”
To contact the editor responsible for this story: Daniel Ten Kate at email@example.com