RBI must keep its focus on growth, let government handle inflation??

ET edit pieces are getting strange these days. They do not want judiciary to interfere in anything as it harms growth and interferes with executive decisions. This completely ignores how dire the situation in India is where the executive is doing what it pleases and creating serious harm to long term growth potential (if anything remains that is).

Now TK Arun says RBI should focus on growth and government should handle inflation…Economics being turned around…

The analysis just looks at WPI and says inflation remains stubborn because of high food prices. RBI cannot do anything about food prices so give them a miss, The focus should instead be on growth and RBI should lower rates to boost investments and economic activity.

The central bank should stay focused on growth, and not be sidetracked by inflation, which remains stubbornly untamed. It is the government that has to act to contain inflation, and some of the requisite action involves greater, rather than curtailed,investment, calling for accommodative monetary policy

Inflation in September has turned out to be marginally higher than in the previous month. Most people conclude from this that the RBI has now no room to lower its policy rates. The conclusion is gross, pun intended. A disaggregated view of prices would lead to a different conclusion. 

Wholesale prices for manufactured goods went up by just 2 per cent in September. Fuel and power went up by 10 per cent. Primary articles went up by 13.6 per cent, with food articles seeing their prices rise by 18.4 per cent. The price of rice went up 18.8 per cent, prices of vegetables rose 89.4 per cent. This has been the pattern in the recent past as well. 

The author does not discuss trends in CPI which shows core persistent at 8% and headline at almost 10%. Is high core in CPI because of  food prices? And will investments pick up with inflation at such high levels?

He says to control inflation govt. should come in, and cut fiscal deficit :

Does this mean that inflation can be ignored? Not at all. The government has to take credible, coherent action to bring down the fiscal deficit, a potent source of excess demand in the system that feeds inflation. 

There are two things the government can do to shrink the fiscal deficit. Double the rate of diesel subsidy removal, from 50 paise to Rs 1 a month. The second reform needed is to levy an import duty of 2.5 per cent on crude oil. This would reduce protection in the refining industry, not eliminate it. The industry can well absorb it. 

Further, the go-ahead large projects, the Delhi-Mumbai Industrial Corridor and oilfield development in Barmer, have finally received must be followed through to produce new orders and activity to break ground and pour cement. Growth will induce fresh investmentand growth.

It is this whole casual approach to inflation which is highly irritating. For growth people have all kinds of ideas but for inflation…lower FD and boost farm supply..

Actually, I wanted to write a similar article with a difference—both govt and rbi should give up inflation..govt shd just look at boosting growth and rbi providing easy liquidity to banks…

The central banks anyways have just become that — provide liquidity to banks and keep bailing out the markets with easy liquidity policy. Any fear in markets and we see central banks bailing them out.

RBI has been in this fix for a while. The flip-flop between liquidity and mon pol continues.

  • It hikes repo to ease inflation but keeps pumping liquidity to aide markets. Isn’t this easy liquidity inflationary as well?
  • It keeps repo untouched but tightens liquidity to improve rupee sentiment.

Such an approach will perhaps keep all happy barring the people affected by inflation.

  • The markets/media/ (FM!) will be happy with huge rate cuts,
  • Banks can get liquidity at cheaper rates and RBI can focus just on its lender of last resort role
  • The Governor will indeed become a superman
  • Govt can just ignore inflation and look at boosting growth…

This will also absolve all to solve India’s huge inflation problem. How else does one explain such complacency to inflation woes? The poor growth figures have been followed by persistent high inflation. Infact inflation woes have been here longer (started from Nov-10) than growth woes (from H2 2011-12). But no one really cares about inflation.

People say CPI has higher food % and hence RBI cannot do anything about it. It has become a huge paradox. Experts say RBI should not target CPI as it has high food and RBI cannot do anything about food inflation. And as it cannot do anything about food prices, it should forget it and lower the rates to boost investment.

Why not then have another CPI inflation which RBI can target? Form a committee (which RBI has been very quick at these days) and look at another measure of inflation. Call it RBI’s CPI which should be getting impacted by interest rates.

I mean how does one ignore the fact that food still forms bulk of the food basket as we are still a poor developing country.  Our per capita incomes still hover around USD 1500 and at these levels inflation will be a problem…

So let inflation be as no one seems to be interested in tacking the problem..

2 Responses to “RBI must keep its focus on growth, let government handle inflation??”

  1. Manish Gahalout Says:

    If you can help me, I have a very fundamental question on economics of inflation. How is targeting WPI different from targeting CPI for inflation control? And why does RBI prefer wpi over cpi? Are they both equally relevant or one is more preferable than other given our country being a developing nation?

  2. Amol Agrawal Says:

    hi manish,

    good q…wpi measures inflation from mandis and cpi looks at prices paid by consumers…first these prices differ. second, consumers have different preferences, so we have different weights for goods in wpi than cpi (food gets nearly 50% in cpi vs around 31% in wpi…wpi does not have any services either..

    so cpi gives different price trends comapred to wpi…so if you target wpi you can say inflation has moderated but cannot say the same when you look at cpi…

    as india had better logistics to collect wpi, wpi has been preferred…cpi was also just across population groups..it was also the case that wpi and cpi moved in same range so did not matter..

    this is not the case now…we have new cpi series which looks at the whole population..and trends differ greatly between wpi and cpi…this makes policy really tough to implement

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