- Introduction – mention inflationary scenario.
- Delineate the measures to control inflation.
- Conclusion & way forward – mention some additional measures.
India is finding it difficult to reign in the raging inflation at 7.8% (CPI for April 2022), with food CPI at 8.4% and WPI at more than 15%. Also, it is assessed that unless bold and innovative steps are taken, both GDP growth and inflation are likely to be in the range of 6.5 – 7.5% in 2022-23.
Measures advocated: For taming these, focused policy actions are needed in at least 3 fronts – (i) tightening of loose monetary policy; (ii) prudent fiscal policy; and (iii) a rational trade policy.
- Tight monetary policy – the RBI is mandated to keep inflation at 4% ± 2%. For this to realize, a tight monetary policy is required by raising the repo rate. It is expected that in 2022-23, the repo rate will be at least 5.5%, if not more. Therefore, depositors will lose the real value of their deposits with negative real interest rates. However, the it will favor entrepreneurs in the name of growth.
- Prudent fiscal policy – due to Covid-19, the fiscal deficit of union government soared to more than 9% in 2020-21 and 7% in 2021-22. But can it reduce the fiscal deficit to less than 5% now ? This seems unlikely to happen given the enhanced food & fertilizer subsidies, cuts in petrol-diesel duties, costing the government at least 3 trillion more than budgetary provision. This requires prudently streamlining the fiscal policies.
- Rational trade policy – ban on wheat exports, restrictions on sugar exports, banning of cotton exports, export restrictions on iron ore and steel, are seen as knee-jerk reactions to tame inflation. Such abrupt export bans are poor trade policies. Rather a gradual process of minimum export prices & transparent export duties for short periods are the need of the hour.
Conclusion & way forward:
- Apart from these, if India wants to be Aatmanirbhar & reduce inflation, it must focus on crude oils & edible oils, where import dependence is unduly high. For crude, import dependence is almost 80% and in edible oils, India is 55-60% dependent on imports for domestic consumption. In crudes, massive production of ethanol from sugarcane & maize is a way to reduce import dependence. These can be cultivated in eastern UP and north Bihar, where water is abundant and replenished every 2nd year. For edible oils, a large programme of palm plantations in coastal areas & northeast will be the right strategy.
- To control food inflation on sustainable basis, India needs to invest in raising productivity and making Agri-markets work more efficiently.
It is hoped that a beginning will be made on these lines.