Price Of Wrong Price Strategy

News: India is now facing a dual problem of low growth and high inflation at the time when India is facing a historic opportunity to use exports to boost India’s GDP growth.

Historic Opportunities

Two large countries China and Russia are reducing their presence on the international trade landscape, providing opportunities to India:

– China, the main export engine of the world has been shutting down its factories, and MNCs are looking for new production locations, and

– Russia is facing strict economic sanctions

What is the status of inflation and growth in the Indian Economy?

Inflation

Inflation has been surging alarmingly over the past few weeks. The CPI (consumer price index) inflation was close to 8% in April against the RBI’s legally mandated target of 4%.

Growth

The economic recovery has been much weaker than expected. The growth was 4.1% in the fourth quarter of 2021-22.

What are the driving forces behind rising inflation?

This has been primarily due to supply-side bottlenecks. This has been triggered first by the pandemic and subsequently by the Russia-Ukraine War and lockdowns in China.

Measures Taken Now

(A) Monetary Policy Strategy

RBI has been pursuing an easy monetary policy. For example, RBI is still in “accommodative” mode.

(B) Fiscal Policy Strategy

The central government is trying hard to bring down the cost of commodities.

The central government has now announced a slew of measures to ease the supply constraints. For example, ban on wheat exports, cap on sugar exports, lowering of the excise tax on petrol and diesel, reduction in the import duty on steel, imposition of an export duty on steel products and increased the export duty on iron ore among others.

What are the issues in the RBI and the government measures to tackle inflation?

(A) Monetary policy

Despite having supply constraints, RBI’s monetary policy is aimed at encouraging demand. As a result, inflation has been increasing.

(B) Fiscal Policy
It is going to have a modest effect on inflation because inflation is now broad-based. It means, it has extended to virtually every good and service in the economy.

Instead of the inflation containment, the government’s interventions will damage growth by undermining exports and investment.

How will the government measures impact the growth?

The government’s actions will have only a marginal effect on inflation. These efforts may cause significant damage to the incipient recovery.

India has unprecedented scope to attract international firms to produce and export from here. But, exploiting the opportunities requires an appropriate policy stance, and a stable and consistent trade policy.

The radical policy exposes both exporters and importers to large losses. For example, firms cannot fulfil their contracts. Thus, foreign firms will be reluctant to place orders with Indian firms.

MNCs will be discouraged from shifting their production to India due to a risk that its exports could be banned, and its imports may be subjected to high duties overnight.

The Centre’s revenue will see reduction due to reduction in excise taxes on petrol and diesel.

Way Forward

The macroeconomic policy has the delicate task of simultaneously tackling inflation and promoting the recovery. Therefore,

The RBI must take full responsibility to tackle inflation. It should give a clear signal that it will focus only on bringing inflation down without getting distracted by any other objective.

The government should focus on growth. It should reduce market interventions, eliminate prohibitions, and dismantle trade barriers. This will incentivise the firms to export and invest.

The government needs to step back from the inflation fight, and instead encourage RBI to tighten monetary policy.

Source: The post is based on an article “Price of wrong price strategy” published in the Times of India on 3^rd June 2022.