Monetary policy has a bearing on food inflation

We must see that the price rise is brought within reasonable limits in the short term. The immediate concern is that food prices,especially that of rice,do not rise fast. Wheat prices have not risen that sharply but rice prices have. The fear of a lower kharif production this year has generated certain expectations contributing to rise in prices of rice. But pulses have been an endemic problem. The supply has fallen short of demand continuously,and we have been importing pulses to plug the gaps. But import is also very difficult as there are very few exporting countries for the kind of pulses we need. Whenever there is additional scarcity it becomes more serious. Expectations have played a big part in pushing up the prices. They have been fed by a deficient rainfall of 22 per cent and a lower cultivation area. The cultivation area this year has also been 5.8 million hectares less,which is about 8 per cent lower than usual. This has lead to the expectation that shortfall in rice production could be about 13-15 million tonnes. The EAC itself estimated shortfall at 13 million tonnes. Others say it could still be higher. The Department of Agriculture has said that there would also be a short reduction in coarse grain supply. Even though scarcity will emerge later,expectations have pushed up prices.

Having said that,the only way to restore normalcy would be to perk up supply through import….

No. Before rice procurement started in the end of September we had a stock of 47 million tonnes of food grains. Of this,the 28-29 million tonnes of wheat should help us to tide over the crisis. What is really required is a judicious release of food grains so that prices do not go up. This can be done through the combined use of open market sales and public distribution system. We must also ensure a good rabi output higher than last year. We must also be prepared if circumstances warrant to import certain quantities of rice.

The rise in inflation to 0.13 per cent is largely on account of food prices. So what is the role that monetary policy should play at this point?

Well,monetary policy has an important role to play in keeping aggregate demand at a reasonable level. Even though it may not have a direct impact on bridging the gap between demand and supply of food grains,it can regulate money supply. So we cannot rule out the role of monetary policy as excessive liquidity can push up prices.

What about credit demand? It is said that the demand for credit is low and there is not much offtake. Small and medium (SME) sector also says that its demand for credit is not met.

Large corporates have been able to go to the market and raise funds. Companies that have projects that are worthwhile have also managed to get credit from the banking system. As far as the SMEs are concerned,unless the banking system is convinced that loan demands are at sustainable levels of credit,it may not be forthcoming. The difference is due to the difference in perception. While SMEs feel they are not getting adequate credit,the banking system looks at a different calculus in terms of risk and the viability. I believe that as the economy picks up and expectations of growth gain momentum,there will be credit flow. In a period when growth is slackening banks also take a dim view but in the coming months there will be a pick-up.

Do you think India should take measures like those of Brazil to moderate capital flows. Are you worried about this?

I think the time has not come as capital inflows are still moderate. At the present moment they can be easily absorbed by the system. EAC has estimated that the gross capital inflows could be around $57 billion this year and current account deficit could be around $25 billion. Therefore,the net addition to reserves could be around $20 billion. It is not a very large increase that will cause concerns for the monetary policy.

But most investment bankers say that the way the deal flow is going and money is flowing in there may be a time in the next three or four months when India may have to take measures on the lines of those taken by Brazil to curb capital flows. Please tell us your views.

Well,these are matters on which the view should be taken when it happens. At the moment,they are at a level that they can be easily absorbed by the system. There are a number of ways of imposing restrictions,which need not involve the imposition of tax. Some countries have hiked cash reserve ratio to curb capital inflows. We have also taken a variety of measures in 2007-08,which were relaxed in 2008-09 on account of the financial crisis. Some of those could be invoked,especially,after analysing where the money is going. If money is coming in as foreign direct investment (FDI) it is good but if it is for financing transactions,say,in real estate,then we might have to take a view.

When do you think would be the appropriate time for the government to withdraw the fiscal stimulus given to the economy during the global financial crisis?

The Budget was framed with a view to let the stimulus continue for the current fiscal. However,if the economy picks up by the next fiscal,the government should begin reversing the process,otherwise it will be difficult to meet the fiscal deficit targets as outlined in the Fiscal Responsibility and Budget Management Act 2009-2010. Significant steps are required to bring down the fiscal deficit by 1.5 per cent. The government really needs to cut down subsidies by next year to make this possible. Crude prices have been benign this year and no additional oil bonds have been issued but prices are expected to move upwards next year.