INDIA is Supply-Constrained...

Article;

India has Potential to Grow at 8 C Rangarajan


Comment;

The problem is that we are considering WPI as a gauge of inflation but other countries like the US and the European countries use CPI as better indicator of inflation which if we consider is above 10%, in INDIA's case. An inflation rate of 10% is enough for a policy response. But since INDIA is supply constrained we have accepted it as normal. As far as growth rate is concerned which dipped to 5% in the last fiscal the RBI need to reduce repo-rate by atleast 150 basis points to push back the economy to 8%, according to the Taylor-Rule. Of the 150 basis point the RBI has reduced repo-rate by 100 basis points sofar which can catapult the economy to around 7% growth rate. Dr. Rangarajan forecast is right but to achieve 8% growth rate the RBI needs to reduce repo-rate by another 50 basis points and to achieve 9% it has to reduce repo-rate by another 50 basis points. But this can not be done due to, again, supply side constraints. Just to note, the RBI reduced the repo-rate by 300 basis points from around 8% to 5% to avert recession in 2008 which pushed the inflation rate from 10% to 20% and growth rate from 6% to 10%. For INDIA growth is not a problem but the supply side bottlenecks are. I disagree that growth in INDIA will not evoke inflation because sofar it has...