IS INDIAN ECONOMY IN DANGER?
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| Credit: Telegraph India |
INTRODUCTION
• India is now dealing with two issues: low growth and high inflation.
• The recovery has been much weaker than anticipated, with growth of only 4.1 percent in the fourth quarter of 2021-22.
• At the same time, inflation has been so high in recent weeks that the government has implemented a slew of counter-measures.
• Unfortunately, this approach is misguided.
• The government's actions will have only a minor impact on inflation, but they may have a significant impact on the nascent recovery.
• Instead of fighting inflation, the government should encourage the RBI to tighten monetary policy.
INFLATION
• With inflation surging and the central government still in "accommodative" mode, the central government has announced a slew of measures to alleviate supply constraints.
• It has prohibited wheat exports, reduced the excise tax on petrol to Rs 8 per liter and diesel to Rs 6 per liter, and reduced the import duty on steel.
• In addition, the government imposed a 15% export duty on steel products and increased the export duty on iron ore from 30% to 50%.
• In April, CPI inflation was close to 8%, nearly double the RBI's legally mandated target of 4%.
• The majority of the inflation is caused by supply-side bottlenecks, which were triggered first by the pandemic and then by the Russia-Ukraine war and Chinese lockdowns.
• Despite the fact that supply has been constrained, the RBI has pursued an Easy monetary policy in order to stimulate demand. As a result, inflation is on the rise.
• Forcing those commodities whose prices have skyrocketed.
ROLE OF RBI
• At this critical juncture, macroeconomic policy faces the difficult task of combating inflation while also promoting recovery.
• First and foremost, the RBI must accept full responsibility for its actions thus far, sending a clear signal that it will now focus solely on bringing inflation down without being distracted by any other goal.
• Government, on the other hand, must priorities growth.
• It must reduce market interventions, eliminate prohibitions, and remove trade barriers to encourage firms to export and invest.
• Instead, if we continue to mix up policy "assignments," we will end up with mixed-up objectives.
• In other words, rather than entrenching growth and derailing inflation, we will derail the recovery and entrench inflation.
• That would be more than a policy blunder. It would be a disaster waiting to happen.
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