Sansad TV Perspective: Tackling Inflation

In the series Sansad TV Perspective, we bring you an analysis of the discussion featured on the insightful programme ‘Perspective’ on Sansad TV, on various important topics affecting India and also the world. This analysis will help you immensely for the IAS exam, especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks.

In this article, we feature the discussion on the topic: ‘Tackling Inflation’

Anchor: Vishal Dahiya

Guests:

1. A.K. Bhattacharya, Editorial Director, Business Standard
2. R. Gopalan, Former Secretary, Financial Services, Ministry of Finance, GoI
3. Rajani Sinha, Chief Economist, CareEdge Group

Context: India’s retail inflation has accelerated to 7.41% in September 2022.

Highlights of the discussion:

• Introduction
• Challenge of Inflation
• Positive Outlook
• Way Ahead

Introduction:

• As per the latest data from the National Statistical Office, India’s retail inflation has accelerated to 7.41% in September from 7% in August, with food price inflation surging sharply from 7.62% in August to 8.6% in September. 
• The country’s rural inflation also picked up further steam from 7.15% in August to reach 7.56% in September, while urban consumers also experienced a resurgence in price rise at 7.27% from 6.72% a month ago. 
• This is the ninth month in a row when inflation has stayed above the Reserve Bank of India’s (RBI) upper tolerance threshold of 6%. As per the RBI Act, the central bank will now have to submit a report to the central government detailing reasons for the failure to contain prices and remedial steps to rein in the price rise. 
• Meanwhile, the Finance Minister of India has said that the Budget 2023 will be carefully structured to address the dual challenges of high inflation and slowing growth. It was also highlighted that the Indian economy is expected to grow 7 percent in the current financial year 2022-23.

For more information on Inflation, read here: Inflation in Economy

Details about the challenge of inflation:

• Inflation is above the RBI’s mandated upper tolerance level of 6 percent and this is a serious challenge.
• This is the ninth month in a row when inflation has stayed above the upper tolerance band, implying that inflation has become deeply embedded in the Indian economy and further gives rise to its own problem of inflationary expectations.
• The seriousness of the inflation can also be attributed to the food and vegetable price surge that drives food inflation. This type of inflation cannot be wished away by referring to it as imported inflation.
• It started as imported inflation which was because of global supply bottlenecks. Subsequently, it combined with high domestic food price inflation making the matter worse and increasing the pent-up demand in the economy.
• The core inflation also behaved steadily before the Ukraine crisis at a higher band grade which caused the inflation to entrench.
• The Russia-Ukraine war put pressure on the supply side and the international commodity price (like oil) surged sharply.
• The Reserve Bank of India was behind the curve six months prior to the Ukraine War and should have acted a little earlier. This could not be well managed.
• Moreover, given the way the monsoon season has turned out, rice production will see a drop of 6 percent which would further worsen the food inflation.
• If the economic recovery is considered, consumption in middle and lower-income categories is still weak but the consumption of the high-income category has increased further pushing up inflation in the service sector.
• The bigger concern is that if the food inflation is high it will put pressure on inflationary expectations and will risk core inflation.
• Inflation is not just an economic issue but is slowly becoming a political issue as the country and various states will go into elections in the coming year.
• There are other factors in play that can further worsen the situation. For instance:
  • In case the prices go up, OPEC plus countries can cut the supply of crude oil.
  • The weakening of the Rupee in the international market as a result of the strengthening dollar can also have some impact.
  • Foreign exchange reserves are declining.
  • There are issues related to liquidity, which is getting sucked up at a faster rate.

Positive Outlook and Future Prospects:

• Inflation should be looked at from a global perspective as the current inflation is more of a global phenomenon. India is doing much better to tackle inflation as compared to other countries like the U.S., U.K, and E.U. where the target is usually 2 percent and is currently experiencing 8 to 9% of inflation.
• There is a limitation on the central bank as it can influence only inflationary expectations. RBI has adopted such measures proactively.
• The government also has taken various steps in the last few months which have controlled inflation to some extent. For example, duty cut on fuel prices, restrictions on imports, import duty cut on various items, etc.
• There could be some respite because the base effect will come into play and the inflation can go down below 7% and by the end of this fiscal year the figures can go down to 6%. However, it will still be higher than the targeted real inflation rate of 4%.
• The global commodity prices including crude oil in the past few months have seen some decline. Some respite is observed in some quarters.
• The Finance Minister of India has also modified budgetary goals to a great extent. The statement of the Minister is a clear indication that the approach will be remodelled towards the dual target of dealing with inflation and growth.
• The four consecutive rate hikes (one out of the cycle) by the Monetary Policy Committee, which will be followed by a further 50 basis point increase in December will help temper the sentiments.

Way Ahead: 

• A set of new measures including supply-side measures are required. The lower half of the economy (the lower leg of K-shaped economic recovery) should be taken care of as it is the part of the economy that is getting hurt the most.
• Public Capex should be increased, as private investments are not showing any signs of resurgence. The potential of private capitalists pushing up growth is very low. However, capital expenditure might cause issues like fiscal deficit and further inflation.
• Unproductive spending should be cut down. There should also be fewer giveaways like subsidies.
• Tax compliance should be enhanced. The tax-to-GDP ratio of both centre and state should be around 24%. But it is very less currently. Technology can also be used to tackle such kinds of situations.
• Assets sales need to be expedited. It should be noted that in the current state of the economy, tax revenues have very limited potential.
• A clear signal should be sent to the centre and states in controlling fiscal deficits. It must be brought down to the path outlined by the Fiscal Responsibility and Budget Management Act.

Read all the previous Sansad TV Perspective articles in the link.

Sansad TV Perspective: Tackling Inflation:- Download PDF Here