n lation and siness le 7.21
heAlthy rAnge of inflAtion (ii) The Government of India accepted
a range of 4 to 6 per cent inflation as
Higher inflation and higher growth as a
acceptable for the economy citing the
trade-off was questioned in the late-1980s by
world average of 0 to 3 per cent at the
the developed economies as the economic and
time (1997–98).64
social costs of higher inflation also needed policy
(iii) The RBI Governor C. Rangarajan
attention—a costly ‘trade-off’.61 In coming times,
advocated that inflation rate must come
most of the world economies went in favour of a
down initially to 6 to 7 per cent and
stable inflation (i.e., inflation targeting) though
eventually to 5 to 6 per cent on an average
the idea has been protested.62 India also started
over the years.65
inflation stabilisation (informed targeting at WPI)
by the early 1970s. It was in 1973 that inflation (iv) The Tarapore Committee on Capital
crossed the 20 per cent mark on account of the Account Convertibility recommended
international oil price rise and the government an acceptable range of 3 to 5 per cent
inflation for the three year period (1997–
(the Indira Gandhi Government) devised a severe
98 to 1999–2000).66
anti-inflation package which included directly
restricting the disposable incomes of the people In the recent times (June 2003 onwards) the
(this measure was used for the first time in India63). government/the RBI has maintained a general
The package had an impact and by March 1975 policy of keeping inflation below 5 per cent
the inflation calmed down to 5.7 per cent. This was mark—at any cost—as if fixing 4 to 5 per cent as
the time when the RBI was given a new function the healthy range of inflation for the economy.67
‘inflation stabilisation’ and India entered the era The medium-term objective (i.e., target) of
of monetary controls for inflation. With inflation the government is to keep inflation in the 4–4.5
targeting there started a debate concerning the per cent range.68 One thing should be kept in
healthy range of inflation for the Indian economy, mind that inflation has always been a political
i.e., by mid-1970s. We may have some official matter in the country. Every time the RBI tried to
and non-official versions of the suitable range of check the rising inflation via monetary measures
inflation pointed out from time to time: a majority of experts objected to it by calling it
a move to sacrifice growth for lower price levels.
(i) The Chakravarty Committee (1985)
A tighter monetary policy decelerates investment
treated 4 per cent inflation as acceptable
for the economy in its report on the 64. Ministry of Finance, Economic Survey 1997–98 (New
monetary system. He also added that Delhi: Goverment of India, 1998), p. 92.
65. Rangarajan, ‘Development, Inflation and Monetary
this level of price rise will facilitate the Policy, pp. 61–63.
purpose of attracting investment for the 66. We may refer to almost all the credit and monetary
desired level of growth. policies announced by the RBI during this period.
67. As the RBI put it in its Credit and Monetary Policy
61. S. isher, odern Central an ing , in . Capie Review of July 31, 2007.
etal.,The Future of Central Banking, The
68. t should e noted here that the level of in ation was
Tercentenary Symposium of the Bank of England
below 5 per cent till the new Government came to power
(Cambridge: Cambridge University Press, 1994)
and the outgoing Government was blamed to freeze
pp. 262–308.
the in ation data to a more politically digesta le level
62. Paul Krugman, ‘Stable Prices and Fast Growth: Just (i.e., below 5 per cent). The new Government in the
Say o , Economist 31 (1996): pp. 15–18. process of preparing a producer price index (PPI) has
63. Ahluwalia and Little, India Economic Reforms and also committed to ma e the in ation data automated
Development, p. 2. like the share indices.