Subbarao's view

A day after India Inc expressed disappointment at the central bank’s decision to hold interest rates, RBI governor D Subbarao called for an end to the blame game between the three critical players of the 
economy—business, the central bank and the government—and underlined the need for them to work together. To deflect the constant demands made on the RBI to address growth issues by cutting rates, the governor instead lobbed the ball back to the government, urging the Centre to reduce fiscal deficit by cutting expenses and bring about reforms in domestic taxation and the foreign investment regime. 
Calling the government’s bluff, Subbarao, who addressed businessmen at the Indian Merchants Chamber, said Europe alone cannot be blamed for the rupee’s woes and that inflation wasn’t merely due to supply- side issues but had a structural element to it. 
Warning that India’s growth rate potential has probably slipped below 8%, Subbarao struck out at those who argued that India at 6.8% was faster than the West. “We must remember that we are a low-income country with a per capita income of less than $1,500. India is a supply-constrained economy and should grow faster to bridge the income gap.” 
Hitting out at those who criticized RBI for depreciation, the governor said, “I do not know why there is an emotional attachment to a certain exchange rate. The exchange rate is just like the price of potatoes—the rate of inflation determines the price. If our rate of inflation is higher, we will have to pay more for foreign currency.” He pointed out that if India grew faster than its trading partners, its currency would appreciate. 
Although prices have moderated since December 2011, it continues to be above acceptable levels. Pointing out that food inflation was driven largely by protein products where prices were rising 15%, Subbarao said this inflation was not cyclical but structural. “You and I may not increase consumption much if our income were to rise by 20%. But in an economy with a per capita income of $1500 any increase in income translates quickly to consumption,” he said pointing out that rural wages have gone up by 20%. According to him, even if inflation was driven by supply side factors, there was a need for monetary intervention because in India there is a tendency for inflationary expectations to build up. 
Subbarao said that 19.3% depreciation of the rupee since August 2011 was worse than comparable currencies because of domestic factors. “The current account deficit has been higher because of demand pressures. Demand for oil remained inelastic given absence of passthrough of prices. Last year Indians imported a record amount of gold. All this gold did not go into jewellery. They are buying gold as an investment and as a hedge against inflation,” said Subbarao. 
“While it is true that other BRIC countries, barring China have also depreciated we must bear in mind that both Brazil and Russia are resource-rich exporting countries. They are probably celebrating the depreciation. But India is an importer and we have a problem if the rupee depreciates,” said the governor. 
The governor in his presentation said that growth could be revived by increasing consumption, investment and exports. According to Subbarao, consumption without capacity addition will only lead to inflationary pressures. 
He said that the widening current account deficit was reflective of higher demand and inadequate supply response. At the heart of the supply response, Subbarao said that there was a need to increase investment in infrastructure and corporate investment in equipment.