Calibrating inflation with growth | The Financial Express

Calibrating inflation with growth

Trade policy solutions, not monetary policy action, will tame food inflation

inflation, economy
While monetary policy specialists are betting whether the RBI will raise repo rate by 25bps or not, my take is that India needs to navigate the inflation and growth puzzle carefully. (IE)

As FY23 comes to a close, India can feel proud that it will be clocking the highest rate of economic growth amongst G-20 countries. The GDP growth may be between 6.8% and 7%, as predicted by the RBI and the ministry of finance, respectively. That’s almost double the so-called ‘Hindu rate of growth’ of 3.5% that Raghuram Rajan, former Governor of the RBI, recently said “India was dangerously close to”. The term ‘Hindu rate of growth’ was coined by my teacher, Raj Krishna at the Delhi School of Economics, indicating that Indian economy moved at its own pace of about 3.5% during 1947 to 1980 or so, no matter which government ruled. But this trajectory has changed since the economic reforms of 1991. Over the last two decades, India registered a robust growth of more than 6.5%, and chances are that it will continue to grow roughly at that pace for another decade or so.

Continue reading this story with Financial Express premium subscription
Already a subscriber? Sign in

However, on the inflation front, India is still not out of the woods. The consumer price index (CPI) inflation in February 2023 was at 6.44%, a notch higher than the upper end of the RBI’s tolerance band.

It is worth noting that inflation is now widely spread out across various commodity groups, with fuel and lighting (energy) leading at 9.9%, followed by clothing and footwear at 8.8%, prepared meals at 8%, and food and beverages at 6.3%. But, since ‘food and beverages’ carries the highest weight of 45.9% in the overall CPI, it is important to tame that as it hurts the poor most.

Also read: The millets march

While monetary policy specialists are betting whether the RBI will raise repo rate by 25bps or not, my take is that India needs to navigate the inflation and growth puzzle carefully. Much of our food inflation is a supply-side phenomenon, and tightening of monetary policy further may not succeed in taming inflation.

Let us look at food inflation carefully. Cereal inflation is at 16.7%, and within this wheat/atta (non-PDS) inflation is 25.4%. While this is worrying, having insulated more than 800 million people through free cereals (5kg/person/month) through PDS supplies, there is no cause for alarm.

In any case, raising the repo rate will not have any impact on this. It is better to use the buffer-stock and trade policies to tame food inflation. In case of wheat, the Food Corporation of India (FCI) has already off-loaded roughly 3 million tonnes (mt) of wheat to beat mandi prices down from about Rs 2,700-2,800/quintal two months ago to roughly Rs 2,200-2,300/quintal today. It is only a matter of a month or two when the retail price inflation in wheat also drastically drops. The coming crop is robust, and the Centre expects it to be a record 112 mt, and the FCI hopes to procure 34 mt with Punjab, Madhya Pradesh, Haryana and Uttar Pradesh likely to contribute the bulk. Even if the situation turns out to be contrary to what the expectations are, the Centre always has the option to import as global prices of wheat have come below $300/tonne. Remember, in FY23, despite ban on wheat exports, India exported about 5 mt of wheat! As far as rice is concerned, the FCI has ample stocks, in excess of buffer stock norms, that it can off-load any time and beat down rice inflation (non-PDS) from 11.2% to less than 5%.

The procurement season for rice is over and the FCI can do open market operations for rice any time. In short, the RBI can wait and watch for another month or two, and I feel cereal inflation will be down.

However, I am worried about milk inflation, which is raging at 9.6% and has a high weight in CPI. Remember that India is the largest producer of milk with 221 mt in FY22, and the value of milk is more than the value of rice, wheat, all pulses, and sugarcane, put together. Although some people in the milk business feel that the Centre’s production data for milk is not very reliable—they also believe this was true for wheat production last year—yet from inflation point, I feel the preferred recourse should be via trade policy rather than the repo rate policy. The basic import duty on skimmed milk powder (SMP) is 60% plus 10% cess for Agriculture Infrastructure Development. Indian SMP prices are way above the global SMP prices.

Bringing down the basic import duty from 60% to, say, 15% in a calibrated manner can augment the supplies of milk in the country and keep a lid on consumer prices of milk. Action today will save the government from milk woes in summer months.

Spices are another group where inflation is surging at 20%, with jeera at 39% and dry chillies at 33 %. The solution, again, will be to use the trade policy to lower import duties to about 15%, which today hover anywhere between 30% and 60%.

Also read: The Indo-Pacific’s defining relationship

RBI must also heave a sigh of relief that none of the TOP vegetables (tomatoes, onions, and potatoes) are giving any trouble. Their inflation is in the negative zone. In fact, onion farmers are up in arms protesting against abnormal drop in onion prices. I wish the government was as active in supporting farmers from dampened prices as it is about putting a lid on higher prices.

In case of onions, the solution is to help onion farmer organisations set up dehydration units so that, in times of glut, large quantities of onions are dehydrated and supplied to bulk consumers like armed forces, hospitals, hostels, hotels and restaurants, etc.

In a nutshell, it is time for the RBI to pause and think, and resist further hikes in repo-rate. Instead, the Centre must use buffer stocking, trade and agro-processing policies to keep food inflation with-in the tolerance band.

The writer is distinguished professor, ICRIER Views are personal

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 20-03-2023 at 04:00 IST
Exit mobile version