Non inflationary rate of growth is the maximum rate of growth that the Indian economy can achieve without fanning inflationary pressures. It is similar to the concept of potential rate of growth and is crucial input in the monetary decisions.
How does this concept work?
If an economy is growing faster than its potential rate of growth, capacities tend to get stretched and resources scarcity emerges. Both producers & workers are then able to raise prices and wages because of the high demand for their products & services. These rising prices across the board lead to generalized inflationary pressures. This implies that there exists a rate of growth for an economy at which inflation will be within a particular comfort zone.
What is the risk at the moment?
India grew by 6.9% in the second quarter that is almost equal to its potential rate of growth estimated by the RBI. A level of growth higher than 7% could translate into another bout of high inflation unless there is investment in capacity creation and easing supply bottlenecks to increase resource flow. According to theRBI annual bulletin for the year 2010-11, the threshold for inflation was in the range of 4-6%.
"Lower trend growth is the result of sharp falls in the investment and savings rates, a higher fiscal deficit and a lack of policy reforms. Therefore, concerted efforts to address supply-side bottlenecks are imperative to reverse the decline." says Sonal Varma
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