Governor of Reserve Bank of India (RBI) Shaktikanta Das announced in early April That the central bank would certainly be right. Instead of keeping the earlier priority ‘growth before inflation’, the RBI will now index ‘inflation before growth’. The assumption sought to be made is that the echo of Russia’s invasion of Ukraine caused ripples in the global economy, causing inflation-growth projections for India to change the RBI’s priorities. This signaled a change in the message, as Mr Das had been saying for months and months that high inflation was eating away at Indians’ saving and spending power.
However, price pressure began to build long before the Russian military left, and is proving to be more persistent than the RBI. Now Government’s latest inflation data This comes days after the RBI’s statements flared up. Inflation hit a 17-month high of around 7% (6.95%) in the month of March, breaking the target level of 4% that the government has set for the RBI, along with an upper tolerance level of 6% To too. Clothing inflation is at a 100-month high. Shoes at 111-month high; Household goods and services at 102-month high.
International prices for food, oil, metals are already high after Russia invaded Ukraine, and companies are passing on rising costs to consumers, which is widespread inflation. But the average inflation rate (6.2%) was above the tolerance band of 2-6% in FY 2020-21; It continued to reign high for most of 2021-22.
policy options
What has made high inflation stubborn is not the Russian war suddenly, but the policy choice of the RBI. The RBI has deliberately and actively fed the inflation dragon by allowing monetary policy to deviate from the inflation target mandated by law. With the recovery fragile, the RBI saw inflation as a lesser evil than the slowdown in growth on the impact of the pandemic. While experts have pointed out for months that this approach may have been fine initially to cushion the economy against the debilitating impact of the pandemic, the RBI maintained it for too long.
Costly misfires involving the financial system flooding with liquidity were such an intervention; Pumping money into the economy for which banks had no use, the demand for credit was modest; and buying huge amounts of government debt, which led to the printing of new money indirectly through liquidity operations. All this was sure to boost inflation one day, but the RBI kept inflation down and is looking less and less capable. It was never going to be of much help for monetary policy to support growth, as there was little support for the economy from fiscal policy, and no one borrowed – other than the government, of course – in times of uncertainty.
Inflation is paying the budget
The RBI says it has tolerated high inflation to pursue a growth mandate, but it has only managed to bring down borrowing costs for the government – that too at a time when government borrowing is at record levels. has increased to. To achieve this remarkable feat, the RBI accepted high inflation. Inflation is paying the budget.
In the defense of RBI, it has been said that inflation in developed economies is at a four-decade high. But with a large poor population, inflation in India is far more painful than in those countries. Per capita income and consumption levels in India remain below pre-pandemic levels, while in the US they rose above those levels only in 2020 on strong support for household incomes through massive emergency relief. India’s COVID-19 relief packages, by contrast, put hardly any money in the hands of the vast majority of the population. Financial and monetary support reached the handful of Indians who could take loans. High inflation, thus, adds to the deep rifts in the economy created by these pro-rich policy biases.
The data on the permanent scars left by the effects of the pandemic will come with gaps; There is no evidence yet to believe that the entire economy is recovering equally. Inflation usually revives economic concerns. The affluent are less affected because they can dip into savings and borrow at lower interest rates, and sometimes even negative interest rates, as is the case now. The savers and the wage earners lose. They think they are getting paid as much, but in reality it is not because money buys less than before. So the government announces dearness allowance and makes inflation-indexed payments for its employees. Inflation is a boon for debt-ridden people, as it affects the erosion of debt.
By staying away from the 4% target for so long, despite its legal mandate, the RBI strikes at the core question of why a country like India endures repeated high inflation. The piercing insights of arguably the most eminent RBI governor are instructive here.
Economists say that when there is an excessive creation of money, the result is inflation; When excess demand arises from a budget deficit or a balance of payments surplus; When the supply of consumer or wage goods decreases with respect to the level of investment.
it’s politics too
But none of this fully explains what is behind the phenomenon they describe, explained Dr IG Patel, who was RBI governor from December 1977 to September 1982. Behind each of them is one common thing: the struggle of one class of society to claim a greater share of national income which other classes are willing to surrender without a fight. Inflation is a manifestation of this social tug of war. This is the result of a failure to settle these power struggles amicably.
And so, he wrote, because there is as much politics in inflation as there is economics, politics as well as economics are needed to bring inflation under control or avoid it.
Delhi-based journalist Pooja Mehra is the author of.The Lost Decade (2008-18): How India’s Growth Story Developed in Growth Without a Story , She is now working on IG Patel biography