THE GIST of Editorial for UPSC Exams : 20 November 2018 (Tackling India’s inflation and policy puzzles)

Tackling India’s inflation and policy puzzles

Mains Paper 3: Economy
Prelims level: Inflation
Mains level: Inclusive growth and issues arising from it

Context

•  Inflation based on consumer price index (CPI) has surprised analysts on the downside.
•  Data released last week showed that inflation for the month of October was at 3.31%.
•  Analysts expect headline inflation to remain low in the coming months as well, partly because of lower food prices.
•  Global crude prices have also come down recently and should help keep inflation in check. The headline inflation number should please both the government and the Reserve Bank of India (RBI).

Inflation in under control

•  It is actually remarkable that inflation remained muted despite the sharp jump in crude prices this year.
•  Its holding at lower levels for an extended period will improve India’s policy credibility and strengthen macroeconomic stability.
•  Though low inflation is desirable, it currently masks a fair amount of policy complexity, both for the government and the central bank.
•  RBI deputy governor Viral Acharya in the October meeting of the monetary policy committee (MPC), for instance, noted: “Since the August policy, food inflation has surprised dramatically on the downside.
•  Seasonal pickup in prices of vegetables and fruits in summer months was simply missing due to a combination of increased mandi arrivals, export policies and other supply management measures.
•  This, coupled with a normal monsoon, has shifted RBI’s food inflation projections significantly downward.”
  Observations by MPC
•  The MPC, in its October meeting, decided to keep policy rates unchanged and changed the stance to calibrated tightening, which basically means that the possibility of cutting interest rates is off the table for now.
•  This newspaper had argued in favour of increasing the policy rate in light of rising crude prices and the falling rupee.
•  Those risks have come down, but the MPC would do well to remain vigilant.
•  There is still a fair amount of uncertainty on the crude front and prices could reverse with the proposed cut in production by the Organization of the Petroleum Exporting Countries and rising geopolitical tension.
•  The rupee has strengthened from its lows, tightening of financial conditions in global markets and the expected increase in interest rates by the US Federal Reserve will continue to put pressure.
•  Markets now expect the MPC to keep rates unchanged in the December meeting.
•  However, if inflation continues to surprise on the downside in the coming months, it is likely that the clamour for lower rates will rise.

Way forward

•  This will pose a policy dilemma. Aside from the fact that core inflation continues to remain high, a narrowing interest rate differential with the US will affect capital flows.
•  Though it makes sense for a central bank in its early days of inflation targeting to be cautious, it should be prepared to face some criticism for keeping the real rates at higher levels.
•  Therefore, while it is good that inflation is under control and is likely to remain so in the foreseeable future.
•  The policymakers will need to address the challenges posed by it so that it is durable and aids economic growth in the medium to long run.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Which of the following are not correctly matched?
1. Lorenz Curve – Poverty estimation
2. J Curve – Taxation
3. Laffer Curve – Devaluation
4. Philip’s Curve – Inflation and unemployment

Select the correct answer:
a) 1 only
b) 1 and 2 only
c) 1, 2 and 3 only
d) All of the above

Answer: C

Mains Questions:
Q.1) Will low inflation benefit the Indian economy?