Double-digit inflation to stay for 3 more months

Rafiq Dossani is known for not mincing his words.

Just when Thomas L Friedman's The World is Flat, and Shashi Tharoor's The Elephant, The Tiger, and The Cell Phone, had taken the world by storm, Dossani penned India Arriving: How This Economic Powerhouse is Redefining Global Business. In the book, this Kolkata-born senior research scholar and executive director of the South Asia Initiative at the Shorenstein Asia-Pacific Research Center at Stanford University, presented an unflinching portrayal of an often romanticised and often misunderstood country.

Dossani, 53, teaches courses in South Asian development, identity and politics at Stanford. He had earlier worked with the Robert Fleming Investment Banking Group, has been the chairman and chief executive officer of a stockbroking firm in India, deputy editor of Business India and a professor of finance at Pennsylvania State University.

In an interview with rediff.com, Dossani spoke about the scourge of inflation, the United Progressive Alliance government's handling of the economy, and other issues. Read on. . .


ndia's inflation has scaled alarming heights. What long-term effect will it have on the country's growth?

Upto the 1980s, the inability to control inflation led to long-term inflationary expectations that had significant negative effects on growth. Corporates spent a great deal of time on managing inflation and less on genuine improvements in productivity. This led to a culture of asset creation rather than income generation.

So, it is important to bring inflation down. The government avoided raising petroleum prices until very recently.

This was a mistake because it had led to consumption decisions that have now to be revised sharply rather than gradually.

The Reserve Bank of India has hiked rates again to counter inflation. But won't it affect the GDP?

It will certainly do so, but was overdue, since rising inflationary expectations are probably worse than a modest drop in GDP. I expect growth to still exceed 7 per cent.


Do you think ill planning on the part of the UPA government led to this inflationary situation in India? Where does the lapse lie?

The political sensitivity to rising prices of essentials was behind the poor planning. The hope was that oil price hikes and commodity price hikes would reverse themselves. But, in the context of the weakening US economy, oil and commodities are hedges against a weak dollar. Since the rupee has recently weakened against the dollar, this made inflation the outcome of political sensitivities.

Indian Finance Minister P Chidambaram said recently that double-digit inflation is to stay for some time. When do you foresee a positive change?

I doubt if double-digit rates will continue beyond the next three months.

t is often said if US sneezes, India catches cold. What are your thoughts on the impact of the US recession on India?

As I said earlier, because of the weakening of the US economy, oil and commodities are hedges against a weak dollar. Since the rupee has recently weakened against the dollar, this made inflation the outcome of political sensitivities.

What measures should the Indian government take to bring down rising prices? Which sectors need to be focused the most?

I don't think the government has control over prices as it used to. It would be best to use monetary policy rather than taxes or controls.

n an interview you had said: 'Next Google will come from a small town in India.' Do you really think any small Indian town can be a hotbed of innovation?

There are several second tier towns that have come up well as centers of growth. I think innovation will come from there because they have domestic markets that can be catered to: Pune, Ahmedabad, Indore, for example.

What, according to you, is the state of entrepreneurial culture in India? How much remains to be achieved?

There has been a marked change for the better, one can see this is in the profitability of the small and medium enterprise sector. I think the main barrier is the high cost of starting business: high rentals, electricity deposits, phone costs: these are out of line with global costs.

Please share with us your observations on the Indo-US trade relations in the time to come.

They are on the upswing. Some sensitive technologies in telecom, materials, etc. remain out of bounds for Indian business, so there is still much to do on this front.

But, from perceptions of risk and as a place to situate a second headquarters to cater to the developing world, India is the natural choice for American multinationals.

Someone from Cisco mentioned last December at a conference on 'Services Globalisation' I had organised at Stanford: A 5.5-hour flight from Bangalore allows me to cover 70 per cent of the world's population.

What are the biggest challenges that the Indian and the US economy face at the moment?

The US faces the costs of subprime excesses and the deadweight costs of security: these are together in the trillions of dollars, so it will take a year or more to work through them. For the Indian economy, it has to be inflation.