The message from Tuesday’s monetary policy announcement by the Reserve Bank is that we will have to live with inflation and moderating growth for some more time due to a combination of domestic and global factors.
The RBI has in fact revised its wholesale price index up to seven per cent for March 2012, against the six per cent it projected in May. This is due to rising crude prices, domestic demand-supply factors and the likely demand scenario in the months ahead. The fuel price hike in May/June this year will add 70 basis points to WPI inflation as a direct impact, and much more indirectly. There are also hidden inflationary factors like higher coal prices in future, which can lead to higher power tariffs. Commodity prices are unstable globally, and a constant source of inflationary pressures. But the nagging question that remains is whether the RBI’s monetary policy is the only weapon available to control inflation. It has been noted that since March 2010, the repo rate (that at which the RBI lends to banks) has been hiked by 2.25 per cent, while inflation has declined in this period by less than one per cent — from 10.3 per cent to 9.4 per cent. Inflation remains stubbornly high, but growth is decelerating. The RBI has said there is no evidence yet of a sharp or broad-based slowdown, but there are signs that growth is moderating, particularly in interest-sensitive sectors.
The RBI’s controlled exasperation over the government’s ineffectiveness in controlling inflation is spelt out clearly in the monetary policy document. It makes it clear that the RBI was forced to take harsher measures in “the absence of complementary policy responses on both the demand and supply sides”. This is a reference to the absence of appropriate government action to deal with supply bottlenecks, specially in food and infrastructure, as a result of which inflation is going up. Sound policies are needed to keep the supply of various products — particularly essential items — in pace with demand. We have only been hearing from the government about demand rising due to increased wages and earnings in rural India, but very little on what is being done to boost supply. The RBI, for instance, has warned that if the rains are not even in different parts of the country, and crops like coarse grains and pulses and protein-rich items are affected, food inflation will rise further. One hopes the government is listening, and will arrange for imports if there is a shortfall in the production of these items. The agriculture and food and civil supplies ministers cannot say they have not been warned. India has huge foreign exchange reserves, and such imports, done in time, can prevent spiralling food inflation. The government must act on several fronts — taking both fiscal and administrative decisions swiftly — if inflation is to be controlled. The other critical issue is the fiscal deficit, which could overshoot the government’s 4.6 per cent target. Fiscal consolidation is critical to managing inflation, the RBI noted, but the government is yet to cut down on frivolous and unproductive spending, which are inflationary, and invest in badly-needed infrastructure.
This is not to say that everything is bleak about the economy. There are some positives: higher indirect tax collections, for instance, and increasing corporate sales and profits and export growth, though the latter is in danger if the global economy does not pick up. Global factors also pose a major hazard to growth as India’s economy is interlined with those of the United States and Europe, both of which are now troubled zones and show no signs of stabilising. These factors could also affect capital flows into India, which are sorely needed to finance the current account deficit.