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Centre, states need to work together to handle inflationary matters: FM

Finance Minister Nirmala Sitharaman also said that the Reserve Bank of India forms a critical part of inflation management, but fiscal policy has to work together with monetary policy in handling the inflationary surge in the economy.

Nirmala Sitharaman, FE Best Banks Awards, Business news, Indian express business news, Indian express, Indian express news, Current AffairsFinance Minister Nirmala Sitharaman. (File)

Stating that inflation management cannot be left only to the Centre, Finance Minister Nirmala Sitharaman said Thursday the Centre and states “need to have a way” in which both work together to handle inflationary matters. The Reserve Bank of India (RBI) forms a critical part of inflation management, but fiscal policy has to work together with monetary policy in handling the inflationary surge in the economy, she said.

Speaking at a conference on ‘Taming Inflation’ organised by the Indian Council for Research on International Economic Relations (Icrier), Sitharaman noted that the inflation rate is higher than the national level in states which have not reduced fuel prices.

“I am not doing politics here, but I’ll bring in an element where you might suspect I am bringing politics, but it has definite relevance. At a time when global fuel prices went up, you wanted to be sure that the burden is not passed on to the end consumer. Where it was possible and how much ever it was possible, the government twice reduced the price of petrol and products. Now, very recently, widely available information in the public domain shows how inflation has varied from state to state. There could be several reasons for it… But the fact remains, coincidentally, I find inflation being higher than the national level in states that have not reduced fuel prices,” the FM added.

“You might think I am stating the obvious, but it establishes the fact that movement of foodgrains and food-related items actually has a bearing on the price of such items, which constitute a bulk of the CPI. Now, if states’ inflation is also to be attributed to the government of India, we need to have a way in which we work together to handle inflationary matters.

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“Just as today there are a lot of discussions about devolution of taxable revenues… similarly, there are, I would suggest, enough justifications to have this understanding of how states also manage their inflation. It cannot be that inflation is handled only by the Centre. And when states don’t take enough steps, that part of India suffers from wanting relief from the stress of inflation. The exogenous factors affect both the Centre and states,” she said.

Sitharaman also said that even though the Reserve Bank of India (RBI) has to synchronise its monetary policy with other central banks, it may not be synchronised as much as developed central banks. “The Reserve Bank will have to synchronise. It may not be synchronised as much as developed central banks. I am not prescribing anything to the Reserve Bank, I am not giving any forward direction to the central bank. But it is the truth: India’s solution to handling the economy, part of which is handling inflation also, is an exercise where the fiscal policy together with monetary policy has been at work. It can’t be singularly left to monetary policy, which has proved totally ineffective in many countries. And these are countries whose structures form the basis for monetary policy theory, that interest rates are the potent tool to manage inflation.”

India’s retail inflation rate softened to 6.71 per cent in July due to moderation in food prices but remained above the RBI’s upper tolerance level of 6 per cent for the seventh consecutive month. In its third straight rate hike after similar ones in May and June, RBI had raised its key policy rate by 50 basis points during its August review.

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The FM said inflation management has several factors, most of which are outside the realm of monetary policy. “India’s experience in handling inflation depends so much on so many different factors. The central bank, its instruments, and its interest rate management form a very critical part of it, but it cannot be the only one.”

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On Russian crude oil, Sitharaman said the decision to continue importing oil from there too was part of inflation management. “In a situation where global prices were going beyond anyone’s affordability, at that stage to take a very strong political decision, I respect the Prime Minister for his courage on this to get it from Russia because they are ready to give it to you at discount. And how speedily did we manage to do it. Otherwise our entire import from Russia was probably 2 per cent or sometimes even lesser, it was ramped up to almost 12-13 per cent within a couple of months,” she said.

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She noted that other countries are also finding their own ways to import Russian crude. “We have cut it down somewhat but can it be further strengthened and the burden on the Indian exchequer to import that much more at that much more price? Can it be handled with a lot more sense of prudence? Will there be political implications on it? Will there be a political fallout because of that? And that’s where I give credit to the statesmanship of the Prime Minister to make sure globally that we did keep our relationships with all countries but yet managed to get the Russian crude. Which is what Japan is doing today, which is probably what Italy and some other countries are also doing. So there are sanctions, but countries are finding their own ways to get Russian crude, Russian gas. That also is a part of inflation management,” Sitharaman said.

First published on: 08-09-2022 at 12:39:41 pm
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