The objective of monetary policy is to meet the twin thresholds of inflation and growth. While inflation should be kept at reasonable levels, economy should experience sustained growth. There is considerable debate in India and abroad about the point of influx, the point beyond which inflation starts impinging on growth. Several studies in Indian context have estimated this point of influx at 5-7 per cent1 of inflation measured in terms of the wholesale price index. While a low inflation could be ideal for inclusive growth, the growth sacrifice from inflation below a threshold may adversely impact the inclusion itself.

Data on growth of Gross Domestic Product (GDP) and implicit GDP deflator (which in effect could be taken as a true measure of underlying inflation in the economy) clearly indicate that the moderation in inflation in last 16 quarters has resulted in an equal (in fact greater) sacrifice in terms of growth. For over 12 quarters the observed GDP growth has also been lower than the potential growth.

R. Gopalan
M.C. Singhi

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