By R Jagannathan
China and India – the fastest growing major economies in the world – appear to be in lock-step over their macro-economic policies. Both are now giving growth weightage even though the battle against persistent inflation is heading for a stalemate.
On Tuesday, Reserve Bank Governor D Subbarao signalled a pause in interest rate hikes from December, despite the fact that inflation is close to double-digits. This is what he said:
“First, both inflation and inflation expectations remain high. Inflation is broad-based and above the comfort level of the Reserve Bank. Further, these levels are expected to persist for two more months. Risks to expectations becoming unhinged in the event of a pre-mature change in the policy stance cannot be ignored.”
But, his actions belied these strong words. His real concerns are shifting to growth: “Growth is clearly moderating on account of the cumulative impact of past monetary policy actions as well as some other factors. As inflation begins to decline, the opportunity emerges for the policy stance to give due consideration to growth risks, within the overall objective of maintaining a low and stable inflation environment.”
Subbarao also specifically ruled out using exchange rates to tame inflation – that is, by getting the rupee to appreciate against the dollar. He told Mint newspaper:
“Depreciation of the rupee certainly adds to inflation and that’s well known. But will we intervene (in the foreign exchange market) to prevent depreciation, or to stop depreciation, or to reverse depreciation as an anti-inflationary tool? No. Because intervention in the foreign exchange market is guided by other considerations. That is a different ballgame and different segment of the policy. We will not prevent depreciation of rupee as an anti inflationary policy.”
Now let’s hear what the Chinese are saying. In recent months, they have been under pressure – especially from Washington – to let the yuan rise, both to reduce its trade surpluses and to beat domestic inflation. This year the yuan has risen close to 4 percent against the dollar when the rupee has fallen.
But the Chinese are more worried about slowing growth. The Wall Street Journal, quoting Chinese foreign ministry spokesperson Jiang Yu, said the yuan can’t really rise more from where it is.
She said: “In the short-term, pushing for rapid yuan appreciation is not possible. If Chinese economic growth slows, it will reduce global aggregate demand,” the Journal quotes her as saying.
In short, China is saying that not only is slower Chinese growth bad for China, it is also bad for the world.
Like India, China is also not giving up entirely on anti-inflation measures. But growth is back to centre-stage. Says the Journal: “China has other levers that it is already pulling to fine-tune its economic policy beyond the yuan’s value. Measures are being rolled out to support smaller companies, which have been starved of access to credit. And Beijing may move to lift restrictions on bank lending…” but “stronger stimulus measures like interest rate cuts don’t look likely…”.
That’s more or less what the RBI is saying, though in different words.
For both China and India, the bottomline is: Growth cannot be compromised just to tackle inflation.