Opinion Ashok Gulati writes: Out of tune
Ashok Gulati writes: An orchestra of multiple instruments is required to deal with the continuing high inflation
All in all, it seems that inflation will remain defiant for this year at least, and may hover around 7 per cent despite RBI’s tightening of monetary policy in the months to come. 
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With inflation, as measured by the consumer price index, in August going back to 7 per cent, and the wholesale price index coming in at 12.4 per cent, one thing is clear: India is not out of the woods on inflation management. If the September inflation remains higher than the RBI’s upper tolerance band of 6 per cent, the central bank, especially its monetary policy committee (MPC) members, will have to explain to the Centre, and in a way to the nation, why it has failed to keep inflation below 6 per cent for three consecutive quarters. That’s as per the 2016 inflation targeting policy. The credibility of the RBI and its MPC members will be at stake.
However, these are not normal times. First Covid-19 hit the world, then the Russia and Ukraine conflict broke out, and now climate change (heat wave) is impacting global commodity prices. In an interconnected world, it would be rational to look at India’s performance in relation to other major countries. In comparison with, say, the US and most European countries, where inflation is a tad higher (8 to 12 per cent) and GDP growth likely to be much lower, India has done fairly well. India is certainly much better placed than countries like Turkey where inflation in July was raging at 80 per cent, or our neighbours — Pakistan, with inflation at 27 per cent, and Sri Lanka at 64 per cent. On average, even compared to the country’s past record, say during the UPA period (2004-05 to 2013-14), when inflation averaged 7.9 per cent (and GDP growth was at 7.7 per cent), India has done fairly well during the NDA period (2014-15 to 2022-23) with 5.1 per cent inflation but has done poorer on GDP growth at 5.6 per cent.
Although the RBI and MPC have been entrusted to keep inflation within the 4 +/- 2 per cent band, from a macroeconomic perspective, it cannot be the sole objective. Inflation’s likely impact on GDP growth must also be considered. That’s where the balancing act has to be, and many other actors have to pitch in. No one could have explained it better than how Finance Minister Nirmala Sitharaman did in a recent conference organised by ICRIER on “Taming Inflation”. She categorically said that inflation management requires an orchestrated play of many policy tools. Monetary policy, though very important, cannot tackle inflation alone. In India, food and beverages have a 45.86 per cent weight in the CPI basket. Therefore, monetary policy has to work in tandem with fiscal, trade and tariff policy, food and agricultural policy, and even infrastructure policy, which has a multiplier of 2.45. She also said that the deal with Russia for importing crude oil at discounted prices was part of an inflation management strategy. While most economists agree that inflation management is a complex problem, and it requires various policy instruments, the question remains: Who is conducting this orchestra of policies — it’s Zubin Mehta, so to say — to create a symphony?
Shankar Acharya, the Chief Economic Advisor under three governments, rightly pointed out that fiscal policy needs tightening as the fiscal deficit has crossed 10 per cent of GDP (Centre and states combined) for three years in a row. This is too high and is causing inflationary pressures, besides being loose monetary policy. Krishnamurthy Subramanian, the CEA when Covid hit, said that the world has much to learn from how India managed inflation while protecting its GDP growth. India was not misled into giving an excessive stimulus to boost consumption demand and instead chose to spend more on infrastructure building that had a high multiplier effect on GDP and also created demand. For developing economies, maybe this was the right strategy.
But as we move forward, how can India rein in inflation to say 4 per cent, and yet keep GDP growth at around 7 per cent? That has not been achieved on a sustainable basis. For this to happen, India needs better macroeconomic management. First, public policy has to be re-oriented from “freebies” to rural area investments with a focus to create more and higher productive jobs, better rural infrastructure, improving the competitiveness of agriculture, agro-based industry and the MSME sector. Next, higher agri-R&D allocations to develop climate-smart agriculture will help increase the supply response of food supplies. Stable and higher farm productivity even in the face of climate vagaries will be critical to tame food inflation, the dominant component of CPI inflation. This would also require taking a call on rationalising the burgeoning food and fertiliser subsidies that could well cross Rs 5 trillion (lakh crore) in 2022-23. One is not sure whether the government will be able to devise, in a timely manner, the creative policy mix this requires. The weights of food and beverages in the CPI basket, currently based on the 2011-12 consumption expenditure survey, need urgent revision.
It seems that inflation will remain defiant for this year, at least, and may hover around 7 per cent despite RBI’s tightening of monetary policy in the months to come. GDP growth, though, is likely to come down a bit lower than the RBI’s earlier forecast of 7.2 per cent, and the IMF’s 7.4 per cent. If India manages 7 per cent GDP growth along with 7 per cent inflation in 2022-23, it would still do fairly well, though that is not the most desirable outcome.
Gulati is Distinguished Professor at ICRIER. Views are personal
This article first appeared in the print edition on September 19, 2022, under the title, ‘Out of Tune’
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