How to keep inflation under control

News: Recently, the GDP growth of India has been pegged at 8.7% for the fiscal year 2021-22. It seems the economy is largely out of the shadow of Covid-19.

But both GDP growth and inflation are likely to be in the range of 6.5 to 7.5 per cent in 2022-23 if bold and innovative steps are not taken.

What are the problems in front of India’s growth story in 2022-23?

India is witnessing a raging inflation that is CPI at 7.8%, food CPI at 8.4%, and WPI inflation at more than 15%

What are the proposed focused policy actions to deal with the problems?

First, the RBI should keep inflation at 4%, plus-minus 2%. For this, it has already started the process of tightening monetary policy by raising the repo rate. There should be fine calibration of the repo rate at least to 5.5% by the end of 2022-3.

Second, the finance ministry should go for more prudent fiscal policy. The fiscal deficit which soared to more than 9% in 2020-21 and 6.7% in 2021-22, in wake of Covid-19 must be tightened.

Third, the government should adopt a rational trade policy. There should not be a knee jerk reaction, like, India announced a ban on exports of wheat, and imposed restrictions on sugar exports in the name of taming inflation. In fact, the abrupt export bans are poor trade policy.  A more mature approach requires a gradual process of minimum export prices and transparent export duties. Further, abrupt restrictions/bans on exports, cannot tame inflation visible globally.

The government can moderate inflation at home through liberal import policy, and reducing tariffs across the board. For example, the government reduced tariffs on palm oil, soya oil, and sunflower oil where CPI is very high. Similarly, the government should also reduce tariffs on rapeseed and cottonseed oils which remain prohibitively high at 38.5 per cent for crude and 49 per cent for refined despite high inflation in the last two years.

What are the challenges?

The fiscal deficit reduction to less than 5% is going to be challenging because of enhanced food and fertiliser subsidies, and cuts in duties of petrol and diesel.

Further, the fiscal policy might remain more populist. Therefore, the fiscal deficit might remain in the range of 6.5 to 7.5% in 2022-23.

Way Forward

The tax revenues should be improved substantially. The government can go for monetising land and assets of public enterprises.

India must focus on two critical commodities, i.e., crude oil and edible oils to become self-reliant. For example, India is almost 80% dependent on crude oil imports and 55-60% dependent on edible oils imports for our domestic consumption.

To reduce import dependence in crude oil, sugarcane and maize production can be promoted, in water abundant states like eastern UP and North Bihar. This can lead to massive production of ethanol from sugarcane and maize.

To reduce import of edible oils, a large programme of palm plantations in coastal areas and the northeast is the right strategy.

To control food inflation on a sustainable basis, investment should be made to raise productivity and to make agri-markets work more efficiently.

Source: The post is based on an article “How to keep inflation under control” published in the Indian Express on 6^th June 2022.