Inlcusive Growth, financial inclusion

Economic policy formulation is based on ‘ceteris paribus’ assumption — a Latin term meaning “all other things being equal or held constant”. In reality this is never the case, and monetary policy formulation is no exception.
The Reserve Bank of India (RBI) will have to grapple with several imponderables when it formulates its first ever mid-quarter policy, to be detailed on Thursday, to deal with inflation.
The government’s chief statistician TCA Anant and chief economic advisor Kaushik Basu have flagged two factors that are fanning inflation — Prime Minister Manmohan Singh government’s thrust on inclusive growth and financial inclusion.
Both goals are important for sustained high economic growth but the programmes’ off-shoot appears to be high inflation rate, for which there seems to be no short-term solution.
Food inflation is 11.5% (in the week to August 28); wholesale price inflation for all commodities was a wee bit below 10% in July. Inflation beyond 6% is perceived to be outside the comfort zone.
RBI is in an unenviable situation — its monetary action to deal with demand-driven inflation seems to have no control over these hidden pressures.
New inflation growth dynamics
“Inflation in recent years is the flipside of inclusive growth,” Anant said. “In the past, rise in inflation used to be in line with (gross domestic product) growth. But in the last three or four years, inflation trend is different,” he said. “The policy of inclusive growth has pushed up demand for wage goods substantially in rural areas. Supply of these goods has not matched demand,” he said.
The big social sector programmes have raised incomes of the poor and given them some spending power even in the worst of times.This combination of inflation and growth does not mean there is overheating of the economy, which could call for slowdown in GDP growth. In fact, India needs higher growth for faster poverty eradication.
“I don’t see any evidence of overheating…India needs to have high growth,” said Pronab Sen, principal advisor to the Planning Commission.
The imponderables — financial inclusion and inclusive growth — that have entered into the system and difficult global economic scenario have resulted in a peculiar situation that calls for frequent monitoring and policy reviews.
“RBI’s decision to have mini-quarterly policy review is a good thing especially when you have an unusual situation,” Sen said.

Reference : http://www.financialexpress.com/news/inclusive-growth-financial-inclusion-fanning-inflation-say-anant-&-basu/681477/

(Dr Kaushik Basu will be inaugurating the Prahelika 2010)