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Economy Dec 19, 2012

Inflation of 5-6% during high growth is not too high: Kaushik Basu

Kolkata: World Bank Chief Economist Kaushik Basu is of the view that inflation of 5-6 percent for India is "not too high" during high growth trajectory.

"If inflation can be kept at 5 or 6 percent that is not too high. We know people had to live with some inflation during very high growth in South Korea in 1970," Basu said when asked whether it is high-time India starts to live with high inflation.

RBI has not cut interest rate since April 2012 citing concerns over high inflation. PTI

Basu said "if a country registers real growth means more food, more cloth everything more...if you get a little more inflation, It will be worth it." However, Basu did not see inflation going down to 2-3 percent as tried earlier. At present, India's inflation is around 7 percent.

Overlooking demands of the industry and the bankers, the RBI yesterday in its monetary policy review had left the short-term lending (repo) rate and the Cash Reserve Ratio (CRR) unchanged at 8 percent and 4.25 percent, respectively.

RBI has not cut interest rate since April 2012 citing concerns over high inflation. Basu believed India's high growth of nine percent if the reforms continued for the next two years.

Speaking at the sidelines of a seminar at IIM-Calcutta, he said there would be no inflationary pressure on the economy due to Direct Cash Transfer (DCT) for subsidies. "DCT doesn't mean there is an injection of liquidity into the system. It is an implicit subsidy. So it will not have any net effect on inflation," Basu said.

"Some of the subsidies which are currently given by distorting prices at a lower level to benefit the poor. Instead of that you replace it with DCT," Basu said indicating at the Public Distribution System(PDS).

Basu emphasised on indexing during DCT regime. "When you switch over to DCT, you index it. You have
an index rule, so that it does not erode with inflation and the people continue to have the same buying power," he said.

While not ruling out the possibility of some misuse of cash subsidy to beneficiaries, Basu said it was better than benefit syphoned off by middlemen. At the same time government should also ensure as far
as possible that women instead of men in a house got the cash. Several researches had shown that use of money by women for household was more productive than by men, Basu said.

PTI


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