If the Government follows RBI's steps to check inflation, the economy may grow or, else, more difficult days await the nation

Severe price rise and plummeting consumer confidence is rattling the monetary policy management of the RBI.

Once again, the Monetary Policy Committee (MPC) finds the high petroleum taxes spurring prices of all commodities and the inflation index. A dissent note on the price front has called for a cut in all taxes on petroleum products. The note says that the bank expects inflation to touch 5.7 percent in 2022 against the present 5.1 percent.

The rising inflation should have resulted in higher repo rates but the central bank has held the rates back to 4 per cent to help the government. Economically, it is not supposed to be a prudent decision as it further restricts purchasing power. This means the industry may not find a conducive environment and the demand side will remain weak.

The RBI Consumer Confidence Survey for July reveals the weakness in the bargaining powers of the working class and high prices putting a squeeze on non-essential spending, a crucial factor for socio-economic progress.

The MPC fine print, however, underlines worrying trends like the threat of stagflation, that is, low growth with high inflation. The MPC might have retained the GDP forecast for 2020-21 at 9.5 per cent but MPC members are seemingly more bearish in their outlook than earlier. The MPC has revised downward the second, third, and fourth quarter projections because of demand-side projections.

An educationist observed that the demand-side problem is even reflecting on the university admissions, particularly of private universities. Admissions are suffering at all levels as parents have squeezed income and little to spare. This indicates that a deep malaise is setting in.

Inflation is the prime concern of the RBI, according to RBI deputy governor Michael Patra. He says, "it is important to bring that down". The current assessment is that the inflationary pressures during 2021-22 are largely driven by adverse supply shocks. The MPC says that there is a large amount of slack in the economy with output below its pre-pandemic level.

To support it, one may refer to the Purchasing Power Index that remains below the critical threshold of 50, values above which signify an expansion in activity, compared to last month. The Nomura India Business Resumption Index has also shown a marginal fall in the last fortnight. A Nomura India economist has pointed to the dissent of an MPC member against the accommodative policy rate stance. 

The dissent note of Raj Kiran Rai G, chairman of industry lobby of Indian Banks Association (IBA) and head of Union Bank of India, says: "RBI 'nudges' the governments at the Centre and states to cut the high indirect taxes on fuel products to bring down the pressure on prices. It is pertinent to note that while the decision of the monetary policy committee for a continuance of the accommodative stance was unanimous in the June policy, it is not so in this policy." He underlined the building of the price pressures.

That is vital. The growth remains uncertain. It fell to 4.04 per cent in 2019-20 from 6.53 per cent in 2018-19. In 2020-21, it plummeted to minus 7.25 per cent and is expected to grow by 9.5 per cent. There are many doubts though.

The World Bank (WB) has slashed India's GDP forecast to 7.5 per cent, which may fall to 6.5 per cent in 2023. It may not be off the mark. The pandemic has disproportionately affected labour and the informal sector. The output gap is predicted by the MPC though it is not confident about the growth. In monetary policy terms, potential output is also taken as the limit which can be reached without stoking inflation.

The MPC does not rule out 5.7 per cent inflation in 2021-22 fiscal. The consumer price index is at a high at 6.16 per cent. With income losses, it hits the demand to critical levels. While bank lending is not picking up, the growth of bad loans spells trouble not only for NBFCs but the whole of Indian economy. If their ability to lend is curtailed due to the surge in bad loans, consumption and demand would weaken further.

This might hit the banking sector as the RBI financial stability report estimates bad loans to touch 9.8 per cent by March 2022. It means lenders may see bad loans rising by Rs 1.3 lakh crore and outgo of Rs 7000 to 9000 crore as interest payment.

The RBI has given the prescription for the government to follow. If it follows the steps to check inflation the economy may spur else more difficult days await the nation.

(The writer is a senior journalist. The views expressed are personal.)