The Reserve Bank of India (RBI) Governor Raghuram Rajan, on Saturday, said the central bank would like to focus on medium-term inflation targeting and will not chase the short-term goals.
“The medium-term is what gives you time to let the economy adjust to the changes that are happening. This is the sensible inflation targeting that we have to debate about,” he said at the annual conference of Indian Economic Association.
Mr. Rajan said no country in the world chased short-term inflation target ignoring domestic and global developments.
“What typically done is ... medium-term flexible inflation targeting ... We want to achieve this objective, and we are going to give a time to reach that objective. And, if we go off track, we will re-calibrate to reach that objective within the medium-term. So, I don’t have to achieve tomorrow but I have to try and get back to it over the medium-term,” he said.
The RBI-appointed Urjit Patel panel has suggested that the central bank should aim at 8 per cent retail inflation (CPI) by March 2015, and 6 per cent by March 2016.
“I do believe RBI still has a role in controlling inflation. We are not going to close shop and go home,” the governor said.
The RBI has kept interest rate (repo) unchanged at 8 per cent since January despite industry and government urging it to cut the rate.
The Wholesale Price Index (WPI)-based inflation is on a decline, and in November, dropped to zero level, the lowest in about five-and-a-half years. Retail inflation, too, fell for the fifth straight month in November at 4.38 per cent.
The RBI will be announcing its next bi-monthly monetary policy on February 3.
Debt waiver schemes
Putting a question mark on the effectiveness of government’s farm debt waiver programmes, the RBI Governor said such schemes had constrained flow of credit to farmers. “In some States on certain occasions we have had debt waivers. How effective these debt waivers have been? In fact, the studies that we have typically show that they have been ineffective. In fact, they have constrained the credit flow post waiver to the farmers,” he said.
On farmers suicide, he said there was a need to study this important and sensitive issue.
“One question is how else we should deal with over indebtedness in the farm sector. Also worth examining very important issue is of farmer suicide. How much they are caused by indebtedness especially to the formal (banking) system, how much formal system alleviates indebtedness....,” the Governor said.
Andhra Pradesh and Telangana governments have declared loan waivers for the farmers hit by cyclone Phailin last year.
While the Telangana government has given the mandated 25 per cent of the written off loan amount to the banks, Andhra Pradesh has not done it so far.
Banks have over Rs.1.3 lakh crore exposure to the farm sector in these two States.
In 2008, the then UPA Government at Centre had come out with Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) 2008 under which 3.69 crore small and marginal farmers and other 60 lakh farmers were given debt relief to the extent of Rs.52,516 crore.
Government auditor CAG had found in several cases that ineligible farmers were given benefit while deserving were left out, pointing to large-scale possibility of fraud.
Farm subsidies
Talking about subsidies for farm sector, Mr. Rajan said that it would be useful to see whether these subsidies had actually helped agriculture or not.
“...The positive aspect is that you are giving a benefit, a cheap credit to agriculture. The concern, however, is whether this credit is being put to right use or is it leading to over indebtedness or distortionary investment.
“We, for example, have crop loan that we have subsidised. But we don’t subsidise longer term loans. Does that change the nature of what kind of activities are subsidised in agriculture? So that’s one issue...,” he added.
