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How to Keep Inflation Under Control

Context

The economy now seems to be largely out of the shadow of Covid-19, and only a notch better than in 2019-20. But the big question remains: can India rein in the raging inflation that is at 7.8 per cent (CPI for April 2022), with food CPI at 8.4 percent, and WPI at more than 15 per cent.

Relevance

GS-III: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Dimensions of the Article

  • Need for bold steps on three fronts to tackle Inflation
  • Way Forward

Need for bold steps on three fronts to tackle Inflation

  • Unless bold and innovative steps are taken at least on three fronts, GDP growth and inflation both are likely to be in the range of 6.5 to 7.5 per cent in 2022-23.
  • Tightening of loose monetary policy: The Reserve Bank of India (RBI) is mandated to keep inflation at 4 per cent, plus-minus 2 per cent.
  • The RBI has already started the process of tightening monetary policy by raising the repo rate, albeit a bit late.
  • It is expected that by the end of 2022-3, the repo rate will be at least 5.5 per cent, if not more.
  • It will still stay below the likely inflation rate and therefore depositors will still lose the real value of their money in banks with negative real interest rates.
  • That only reflects an inbuilt bias in the system — in favour of entrepreneurs in the name of growth and against depositors, which ultimately results in increasing inequality in the system.
  • Prudent fiscal policy: Fiscal policy has been running loose in the wake of Covid-19 that saw the fiscal deficit of the Union government soar to more than 9 per cent in 2020-21 and 6.7 per cent in 2021-22, but now needs to be tightened.
  • Government needs to reduce its fiscal deficit to less than 5 per cent, never mind the FRMB Act’s advice to bring it to 3 per cent of GDP.
  • However, it is difficult to achieve when enhanced food and fertiliser subsidies, and cuts in duties of petrol and diesel will cost the government at least Rs 3 trillion more than what was provisioned in the budget.
  • Rational trade policy: Export restrictions/bans go beyond agri-commodities, even to iron ore and steel, etc. in the name of taming inflation.
  • But abrupt export bans are poor trade policy and reflect only the panic-stricken face of the government.
  • A more mature approach to filter exports would be through a gradual process of minimum export prices and transparent export duties for short periods of time, rather than abrupt bans, if at all these are desperately needed to favour consumers.
  • Liberal import policy: A prudent solution to moderate inflation at home lies in a liberal import policy, reducing tariffs across board.

Way Forward

  • If India wants to be Atmanirbhar (self-reliant) in critical commodities where import dependence is unduly high, it must focus on two oils — crude oil and edible oils.
  • In crude oil, India is almost 80 per cent dependent on imports and in edible oils imports constitute 55 to 60 per cent of our domestic consumption.
  • In both cases, agriculture can help.
  • Ethanol production: Massive production of ethanol from sugarcane and maize, especially in eastern Uttar Pradesh and north Bihar, where water is abundant and the water table is replenished every second year or so through light floods, is the way to reduce import dependence in crude oil.
  • Palm plantation: In the case of edible oils, a large programme of palm plantations in coastal areas and the northeast is the right strategy.
  • We need to invest in raising productivity, making agri-markets work more efficiently.

Source – The Indian Express


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