Inflow of money will not help curb inflation: Bimal Jalan

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India's industrial production and GDP growth may be bouncing back. But the government and the Reserve Bank of India (RBI) have now an equally stiff test in the fast rising inflationary environment. So what should the strategy be to tackle inflation in a non-disruptive manner?

In an exclusive interview with CNBC-TV18, Former Governor of the Reserve Bank of India, Bimal Jalan, spoke about measures to tackle inflation and the steps the RBI could take to counter it.

Here is a verbatim transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: Commodity prices are moving back up, gold is making fresh highs, the dollar continues to weaken, and crude trending close to the 80 dollar mark- what worries you about the present situation the most?

A: We are talking about ten years which means 1998-99 to 2008-09. You can see that in 1998-99 the biggest issue was the Asian crisis. And today it is completely different.

We still have the financial crisis but that's in the US and everywhere else and at that time there was also a lot of doubt on whether India would be able to survive it, and we were badly affected for a while because our reserves were not very high. So, that was a very difficult period.

Today, as we know, the general consensus is we are doing well, our reserves are very good, the balance of payments are strong, exchange rate management is good, instead of depreciation fears there are fears about acceleration, everything in India today seems to be so much better than what was the case ten years ago.

Q: Given the fact that we are now entering a new decade starting 2010, put it into context for us, what would you say have been the big reforms that have actually taken place?

A: It is not a tightrope walk. You are otherwise very strong, the growth prospects are good, foreign exchange reserves are good. Inflation is a problem partly because of the bad monsoon and hopefully that can be corrected. You have no problem about imports.

So I don't think it is a tight rope walk at all. It is a question of ability, willingness and consensus on what needs to be done to save India from the kind of bubbles that struck us in 2007-08, and what should be done to make things clear, transparent and less complex than they are in terms of the discretionary government interventions, or anybody's interventions including the RBI I presume.

Q: Inflationary pressure is largely a supply side phenomenon at this point. Food prices continue to spiral out of control. In this situation would you advocate any sort of tightening in rates?

A: Inflows of money is not going to help inflation. Excess flows of money or credit or stock market bubbles don't control inflation. Inflation is as you said about supply side in relation to demand for those food products.

What we have to look into is also the futures market and how is this working. In terms of the gap in wholesale prices, which is in the wholesale price index and the commodity price index, which is the retail price, one of the most important issues is to see whether it has widened, the difference between the factory prices and the retail prices and why it has widened. This requires a certain amount of further consideration and research. CPI is 12-13% and WPI is 1%, does it make any sense?

Q: GDP growth expectations range from about 6.5-7% on the basis of the signals that you read. What is your own assessment of it?

A: I don't think that is at all important. I know that in the media, in the headlines and everything it is 6.7% or 6.5% is vital. But how does it matter whether it is 6.5% or 6.7%? It matters if it is 6.5% or 4%, it matters whether it is 6.5% or 9%.

But I don't think these differences of the order of half a percentage or one percentage point is very significant and it doesn't mean very much, to my mind. I am sorry about it. I don't take a side on this issue.