Just minutes after the release of data showing retail inflation at a record low of 1.5 per cent in June, Chief Economic Adviser in the Finance Ministry, Arvind Subramanian issued a fresh salvo at the monetary policy committee (MPC) led by the Reserve Bank of India governor Urjit Patel. Subramanian said, the “paradigm shift” to low levels of price rise had been missed by everyone. “This low, heartening number is consistent with our analysis for some time now, and which will be fully elaborated in the forthcoming survey, of a paradigm shit in the inflationary process to low levels of inflation- a shift that I think has been missed by all, reflected in the large, one-sided, and systematic inflation forecast errors that have been made.”
The statement was seen as a criticism of the MPC's reading of inflationary signals. Data released by the Central Statistics Office showed retail inflation slowed to a record low of 1.5 per cent in June, below the reading of 2.2 per cent in May, mostly due to low food prices. At the same time, industrial output growth slowed to 1.7 per cent in May, compared with 8 per cent a year ago. The MPC had assessed inflation to be much higher than the actual reading and used the analysis to keep rates unchanged. Along with the government's leading economist, several private sector economists said the MPC's reading of the price situation is faulty.
Subramanian's fresh statement suggested a need to cut rates. “Clearly, this low number and what it implies about price pressures, as well as the latest IIP data just released, is something that, I am sure, all policymakers will reflect upon very carefully,” he said. He pointed out that such low levels of inflation were last seen in 1999 and in August 1978.
Earlier, there were reports about government's unhappiness over the Reserve Bank's inflexibility on interest rates. The government's differences had spilled into the open with Subramanian reacting to the MPC's decision to hold rates by resorting to the unusual step of issuing a written statement backing a rate cut. The government, unhappy with the MPC's stance on rates, had sought a meeting with the members of the panel, which was turned down by the MPC.
A section within the government has dismissed the differences between the central bank and the finance ministry and had gone to the extent of suggesting that the CEA's comments following the last monetary policy review were in his personal capacity. In fact, they had cited a lunch meeting in the PMO, where Patel had been invited, to argue that all was well between the two arms.
