Inflation targeting: Current target band should be extended for 5 more years, says Niti Aayog vice-chairman Rajiv Kumar

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March 04, 2021 12:30 AM

India’s economy regained quite a lot of lost steam in the December quarter, to register a flat growth of 0.4% after two consecutive quarters of deep contraction caused by the pandemic, according to official data.

In FY21, the GDP would contract by 8%, the sharpest drop in recorded history, as per the second advance estimate released recently; the contraction was previously seen at 7.7%.In FY21, the GDP would contract by 8%, the sharpest drop in recorded history, as per the second advance estimate released recently; the contraction was previously seen at 7.7%.

Endorsing the Reserve Bank of India’s view that inflation tolerance band of 4 (+/-2)% should be retained, Niti Aayog vice-chairman Rajiv Kumar said the band serves the purpose and should be retained for the next five years. “I can’t see any significant changes in the macro economic situation that would warrant any major changes in inflation target that we have,” Kumar told FE.

The RBI’s report on currency and finance for 2020-21 released on February 26 noted that the current inflation tolerance band should be retained for the next five years. “The international experience suggests that inflation targeting EMEs (emerging market economies) have either lowered their inflation targets or kept their targets unchanged over time. In India, however, the repetitive incidence of supply shocks, still elevated inflation expectations and projection errors necessitate persevering with the current numerical framework for the target and tolerance band for inflation for the next five years,” said the report. A disclaimer in the document stated that the report represents the views of the central bank executives who authored it, and not that of the RBI.

AS FE reported recently, many economists have cautioned against a dilution of the extant inflation target, especially given the elevated fiscal deficit projections until FY26. Some even pitched for having a closer look at core inflation while continuing to target the headline retail inflation in the 4 (+/-2)% band.

Over the October 2016 to March 2020 period, headline inflation averaged 3.9%. Trend inflation estimates stood in the range of 3.8 – 4.3% for the flexible inflation targeting (FIT) period.

The enactment of the inflation targeting framework was done on May 14, 2016. As per the pact between the RBI and finance ministry, this inflation target is applicable for the period from August 5, 2016 to March 31, 2021. If the MPC fails to keep price rise in this band for three consecutive quarters, the RBI governor would have to write to Parliament as to why it failed and what corrective action needed to achieve the target.

On economic revival, Kumar said the country’s real gross domestic product (GDP) may contract 7.5-8% in FY21 as Q4 GDP growth may not be as robust as anticipated. “Q4FY21 GDP growth will be positive but may not be robust as thought to be because consumption demand seems beginning to plateau,” he said. For FY22, Kumar expects 10-11% real GDP growth and about 15% nominal GDP growth.

India’s economy regained quite a lot of lost steam in the December quarter, to register a flat growth of 0.4% after two consecutive quarters of deep contraction caused by the pandemic, according to official data. In FY21, the GDP would contract by 8%, the sharpest drop in recorded history, as per the second advance estimate released recently; the contraction was previously seen at 7.7%.

The second advance estimate for FY21 indicates an improvement in GVA growth to 2.5% in the fourth quarter. But it projected the GDP to slip back into a 1.1% contraction in the March quarter, due to back-ended release of subsidies by the government.

On the recommendation by a Niti Aayog panel to reform the National Food Securities Act (NFSA) 2013 to reduce the coverage of rural and urban population from 75% and 50% respectively to 60% and 40% to cut down on burgeoning food subsidies, Kumar said such a move might not be advisable at the moment as many people could have have suffered income loss and employment loss due to Covid-19. “I think it’s a work in progress,” he said.

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