Out of tune: An orchestra of multiple instruments is required to deal with the continuing high inflation

Source: The post is based on an article “Out of tune: An orchestra of multiple instruments is required to deal with the continuing high inflation” published in The Indian Express on 19th September 2022.

Syllabus: GS 3 – Indian Economy and issues relating to planning, mobilization, of resources.

Relevance: Inflation and issues associated with it

News: Covid pandemic and Ukraine war has led to the rise in inflation. The inflation is currently at 7 percent (CPI-based) and 12.4 percent (WPI based). However, inflation in India is better when compared to other countries.

What is the situation of inflation in India compared to other countries across the world?

India has done well when compared to the US and most European countries where inflation is higher ranging from 8 to 12 percent.

The rate of inflation in India is also lower than in Turkey (80%), Pakistan (27%) and Sri Lanka (64%).

What is the current situation of the Indian economy and what can be done?

Inflation

Problems: RBI and MPC have been entrusted to keep inflation within the 4 +/- 2% band but targeting inflation should not be the only objective. Inflation has also impacted the GDP growth of the country.

Solution: Finance Minister has recently said that inflation management requires organization and coordination of many policies. Monetary policy alone cannot tackle inflation.

Therefore, monetary policy along with fiscal, trade and tariff policy, food and agricultural policy, and infrastructure policy should work together to control inflation.

Fiscal deficit

Problem: Fiscal deficit has crossed 10% of GDP (Centre and states combined) for continuously three years. This deficit is causing inflationary pressures along with loose monetary policy.

Solution: A tight fiscal policy is needed.

However, India has effectively managed its inflation despite various problems.

How has India tried to manage its inflation?

India has effectively managed its inflation during the pandemic hit and protected its GDP growth also. This is done by a) Not giving an excessive stimulus to boost consumption demand, b) Spend more on infrastructure building that had a high multiplier effect on GDP which created demand, c) Recent deal with Russia for importing crude oil at discounted prices was part of an inflation management strategy.

What can be the further course of action to control inflation?

India needs better macroeconomic management to put inflation at 4% with GDP growth at 7%. The measure that can be taken are –

First, there is a need to re-orienting public policy from freebies to investments in rural areas. India needs to focus to create more and higher productive jobs, better rural infrastructure, improving the competitiveness of agriculture, agro-based industry and the MSME sector.

Second, there is a need for higher R&D allocations in agriculture. This will help to develop climate-smart agriculture with an increase in food supplies. Stable and higher farm productivity is required during unexpected climate change to control food inflation.

Third, there is also a need to rationalize the food and fertilizer subsidies that are expected to increase to Rs 5 lakh crore in 2022-23.

Fourth, food and beverages have a 45.86% weight in the CPI basket in India. The weights of food and beverages in the CPI basket need urgent revision.