Signs of economy overheating, says Montek, PM adviser agrees

Two top planners today warned that the economy was overheating at 9 per cent growth rate which in turn was keeping inflation at two-year highs of around 6.5 per cent.

Two top planners today warned that the economy was overheating at 9 per cent growth rate which in turn was keeping inflation at two-year highs of around 6.5 per cent.

While C Rangarajan, chairman of the economic advisory council to the Prime Minister, said he saw “some signs of overheating”, Planning Commission deputy chairman Montek Singh Ahluwalia was more categorical, saying “there are signs of overheating in the economy and the 9 per cent economic growth is putting pressure on inflation”.

Later, Montek told The Indian Express that the fact that monetary action is being taken to contain inflation means that action is being taken to prevent overheating (when productive capacity is unable to keep pace with growing demand). He said demand was exceeding supply, so the government was resorting to supply-side intervention through monetary action to calibrate the two factors and thus keep inflation under control. “This is normal practice.”

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Earlier in the day, he said that inflation may put pressure on high growth initially, but on an average, the target of 9 per cent growth during the XIth Plan would be maintained.

Separately, former RBI chief Rangarajan said at a book release event that “what we really need to see is that overheating… must not become structural”. Overheating “would become structured if certain sectors of economy like infrastructure do not develop as fast as the economy”, he said.

Rangarajan said the current price rise too was unacceptable. “In the world of today, inflation rate of 6 per cent is not acceptable. Certainly, we should…address monetary demand side, which is growing at over 20 per cent.”

Allaying fears of policy overkill, Montek told Express there was no reason to believe that the government action would lead to a situation where the demand gets suppressed while supply keeps increasing, leading to a reverse situation of supply exceeding demand. He said demand would be kept up with increase in investments.