Reserve Bank of India (RBI) Governor Shakktanta Das announced a course correction by the central bank in early April. Instead of the previous priority of “growth before inflation”, the RBI would now rank “inflation before growth”. The impression they wanted to give is that the repercussions of the Russian invasion of Ukraine spilling over the global economy turned inflation growth forecasts for India on their head and changed the RBI’s priorities. This signaled a change in the message as Mr Das has been saying for months and months that high inflation, which has been eating away at Indians’ savings and purchasing power, is temporary.
However, the pressure on prices had built up well before the Russian forces moved in and is proving to be more persistent than the RBI had anticipated. Now the latest government inflation data, which came days after the RBI said, shows a flare-up. Inflation hit a 17-month high of almost 7% (6.95%) in March, exceeding both the government’s 4% target level for the RBI and the 6% upper tolerance limit. Clothing inflation is at a 100-month high; footwear at a 111-month high; Household goods and services at a 102-month high.
Already high international prices for food, oil and metals rose after Russia invaded Ukraine, and businesses are passing the rising costs on to consumers in broad-based inflation. But the average inflation rate (6.2%) in fiscal 2020-21 was above the 2-6% tolerance band; it remained high for much of 2021-22.
political decisions
What made the high inflation persistent is not suddenly Russia’s war, but the policy decisions of the RBI. The RBI fed the inflation dragon by deliberately and actively allowing monetary policy to deviate from the statutory inflation target. Given the weak recovery, the RBI viewed inflation as the lesser evil compared to the slowdown in growth due to the impact of the pandemic. Experts have been warning for months that while this approach may have been fine initially to cushion the economy against the debilitating effects of the pandemic, the RBI has kept pace with it for too long.
Costly misfires include flooding the financial system with liquidity long after such intervention is necessary; pumping money into the economy that the banks had no use for because the demand for credit was modest; and the purchase of vast amounts of government debt, which indirectly leads to the printing of new money through liquidity operations. All of this would certainly fuel inflation one day, but the RBI shrugged off inflation smugly and appeared less and less competent. Monetary policy would never do much to support growth, since fiscal policy does little to support the economy and nobody – except of course the government – borrows in times of heightened uncertainty.
Inflation pays for the budget
The RBI says it has tolerated high inflation to pursue the growth mandate, but all it has managed to do is bring down the cost of government borrowing — and it’s doing so at a time when government borrowing has soared to record levels may be. To achieve this remarkable feat, the RBI accepted higher inflation. Inflation pays for the budget.
In RBI’s defense, inflation in advanced economies is said to be at four-decade highs. But with a large poor population, inflation in India is much more nagging than in those countries. Per capita income and consumption levels in India remain below pre-pandemic levels, while in the US it had risen above even that level in 2020, owing to massive support for household incomes from massive emergency aid. India’s COVID-19 relief packages, on the other hand, put little money into the hands of the vast majority of the population. Financial and monetary support reached the handful of Indians who were able to borrow. High inflation is thus contributing to the deepening cracks in the economy created by these pro-prosperity policies.
Data on the lasting scars left by the effects of the pandemic will be delayed; There is no evidence yet that the economy as a whole is recovering evenly. Inflation usually fuels economic fears. The wealthy are less affected as they can save and borrow at low interest rates and sometimes even negative rates as is currently the case. Lose savers and wage earners. They think they’ll get paid the same, but in fact they’re not, because money can buy less than before. For this reason, the government announces a cost-of-living allowance and has inflation-indexed payouts for its employees. For those in debt, inflation is a boon as it erodes debt.
The fact that the RBI has stayed away from the 4% target for such a long period of time despite its legal mandate goes to the heart of the question as to why a country like India repeatedly tolerates high inflation. The penetrating insights of arguably RBI’s most important governor are revealing here.
Economists say that when there is excessive money printing, the consequences are inflation; when the excess demand stems from a budget deficit or balance of payments surplus; if the supply of consumer or wage goods falls short in relation to the amount of investment.
It’s politics too
But none of this fully explains what is behind the phenomenon they describe, explained Dr. IG Patel, who was RBI governor from December 1977 to September 1982, had a higher share of national income than other parts are willing to give up without a fight. Inflation is the manifestation of this social tug of war. It is the result of the failure to settle these power struggles amicably.
And so he wrote, because there is as much politics in inflation as there is in economics, it takes both politics and economics to control or avoid inflation.
Puja Mehra, a Delhi-based journalist, is the author of “The Lost Decade (2008-18): How India’s Growth Story Became Growth Without a Story ‘. She is currently working on a biography of IG Patel
