Inadequacy of the monetary policy to address inflation
- Inadequacy of monetary policy to address food-price-driven inflation has been recently flagged.
Inflation in India
- In India, government agencies are announcing that country is growing at much faster rate than most economies and inflation is much lower.
- It is not surprising as among larger economies of the world, India’s economy contracted the most in 2020-21.
- Before U.S. announced rise in inflation rate, inflation in India was close to what it was there.
Factors driving inflation
- For commodity groups ‘fuel and light’ and ‘fats and oils’, which are majorly imported, inflation has been lower in first five months of 2022 than in last five months of 2021.
- For ‘food and beverages’, it was reverse.
- Inflation has been much higher in more recent period.
- Estimated direct contribution of this group to current inflation dwarfs other groups, establishing conclusively that inflation is driven by domestic factors.
- Inflation in India was trending upwards from October 2021, even before war in Eastern Europe.
- Such diagnosis of current inflation is belied by the fact that the price of food is rising faster than that of other goods.
- Excess demand is in the market for foodstuff, and it is this that needs to be eliminated.
- Using monetary policy to curb inflation under these circumstances is to miss the point that being a macroeconomic instrument, it cannot affect any particular price.
Necessary food surplus
- Inadequacy of monetary policy to address food-price-driven inflation has been flagged by economists internationally.
- Supply-side interventions are needed.
- View that inflation in India is due to excess aggregate demand curable by raising interest rates ensures that attention is not paid to necessary supply-side interventions.
- Food in India has never been plentiful, reflected in high share of average household budget devoted to it.
Conclusion
- Failure to see inflation in India as reflection of structural feature of its economy ensures that there is very little chance that one of India’s urgent problems will be solved.