Mumbai, July 11 (IANS) Reserve Bank of India (RBI) Governor D. Subbarao has expressed optimism that India will soon return to a high economic growth of 9 percent, even as he ruled out the spectre of deflation in the country, when low inflation is accompanied by low industrial output.
“For me, the single most important objective is returning the economy to a high growth path,” Subbarao said in an interview to the London-based Central Banking Publications that was posted on the RBI website.

“The challenge for the Reserve Bank will be to create the stage for a 9 percent growth in an environment of price and financial stability,” he said. “Higher growth in India cannot be meaningful unless the gains of growth are distributed more widely.”

The central bank governor acknowledged that there was concern over deflation in India, especially since the annual inflation rate based on wholesale prices had turned negative a few weeks ago.

Deflation refers to a reduction in aggregate level of demand, which results in falling prices of goods. Such a situation discourages manufacturers from producing goods and intensifies the recessionary cycle in the economy.

“It is important for the central bank to communicate the message that this is not a structural deflation and that what we are seeing is purely statistical in its nature,” he said.

“Our negative inflation does not reflect a demand constraint. Far from it. We are a supply-constrained economy, not demand constrained.”

During the course of the interview, Subbarao admitted that the much touted “decoupling theory”, which predicted that emerging economies would continue to grow even while advanced countries went into recession, was not accurate.

“The decoupling theory was never totally persuasive in a globalising world and its credibility has been seriously dented by the events of the past few months,” said Subbarao.

“If the downturn in advanced economies is relatively mild, then emerging economies could do enough through policy responses to insulate their economies. But if the downturn is severe, they will be impacted, of course differently in different economies,” he added.

The governor also sought to dispel the notion that India’s central bank was not doing as much as other central banks around the world in the context of the economic crisis.

“Countries have had to respond to the specific situation in their countries,” said Subbarao.

“In the advanced economies, the transmission of the crisis has been from the financial sector to the real sector. In contrast, in a number of countries including India, the transmission of the crisis has been from the real sector to the financial sector and iterations thereon.”