Synchronize policies to counter weak growth and high inflation

Source: The post is based on an article “Synchronize policies to counter weak growth and high inflation” published in The Live Mint on 16^th September 2022.

Syllabus: GS 3 – Indian Economy – Growth and Development

News:  This article discusses the problem associated with the rising inflation and measures that can be taken to tackle this.

The Indian economy has suffered a huge set-back with the pandemic. However, with the efforts of RBI and government, it is reviving still there are other problems emerging that need attention.

What is the current situation of Indian economy?

The headline inflation rate in India has remained above RBI’s upper tolerance limit of 6% since January and now has again exceeded 7%.

The reason behind high headline inflation is high food and energy price inflation across the world.

It has brought the challenge of low growth and high inflation, which requires the close fiscal-monetary policy coordination for resolution.

How coordination of fiscal-monetary policy can help?

Finance Minister Nirmala Sitharaman recently reportedly remarked that RBI cannot contain inflation on its own. Some of the facts make this statement true.

There is a significant supply disruption both at home and abroad due to various factors like Ukraine crisis. RBI’s policy instruments are not particularly effective in addressing supply constraints.

Given supply constraints, RBI can impose exceptionally harsh contractionary policies to curtail demand, even for necessities like food. These policies may lower the inflation rate but poor households will be the most affected.

Therefore, it is required that central and state government should intervene in using its fiscal measures to ease the restrictions from the supply side.

What can be the further course of action to tackle the increasing inflation?

First, there should be close coordination between RBI and the government to tackle this issue.

Second, government can intervene by taking different measures like easing domestic infrastructure, imposing temporary restrictions on exports of essential commodities, etc.

Apart from the intervention the central government’s fiscal policy should continue to focus on stimulating aggregate demand and reviving growth.

Third, the Tinbergen rule should be followed. This rule says that the monetary and fiscal policy instruments should be separately assigned to address the two different policy goals of reducing inflation and reviving growth.