Debt management is a priority for the Government
US Economist Milton Friedman had said that inflation is taxation without legislation. A price rise hurts most to those who sit at the bottom of the pyramid in the social structure. Recent data released by the government shows that consumer price index (CPI) has increased to 5.59 percent in December. If we just see the data on the face of it then it will appear that rural inflation crossed 5 percent and food inflation has also peaked to 4 percent in December. In a way this is worrying because CPI numbers are reaching the RBI mandated upper limit of 6 percent. But the Devil lies in the details. A closer look at the data reveals that inflation has gone down in December as compared to previous month and the index has shown a decline of 1.18 percent. Despite the pandemic and the farmers’ protest, food prices have increased moderately but skyrocketing prices of edible oil needs to be kept under control. Initiatives like National Edible Oil Missionare good for long run but immediate measures must be taken to contain the increasing price. Providing free ration to large part of the population has certainly helped the lower class which faced issues of job loss and decline in income. Wholesale price index (WPI) for December has shown price rise of 13.6 percent. The stark divergence between CPI and WPI is another point which indicates the strong domestic demand. It can be taken as a positive indicator where Indian manufacturers are using their pricing power and the volume is allowing retailers to make profit even after absorbing some of the wholesale price rise. There can be counter arguments that such kind of divergence between these two indicators means retailers are losing their profit margin but the increased indirect tax collection doesn’t support this view. In pandemic, people used more goods as compared to services and therefore price rise in goods were more. WPI covers only goods and therefore this divergence includes this aspect also. All the major economies of the world are facing inflationary trends and US inflation hit 39 years high in December when it touched 7 percent. There are concerns that Federal Reserve will hike the interest rate and pandemic era stimulus will be cut back. If this happens then it will impact India also and capital outflow can be seen. Our foreign exchange reserves are sufficient to cover such short-term impacts.This situation is not all bad from Indian perspective. Action taken by US Fed will have impact on exchange rate also and in all likelihood, INR will weaken against USD, if RBI doesn’t intervene. This situation will be favorablefor Indian exporters, particularly IT and ITES industry.
RBI is entrusted with the responsibility of managing the inflation rate within the given range of 2 to 6 percent. Recent surge in inflation is transitory in nature and it is largely due to increase in input prices (cost push)caused by interruption in global supply chain. In the current scenario, the central bank should continue to prioritize growth and employment over inflation. Real interest rate in India is near to zero and a low borrowing cost is good for a developing economy. The Government has increased the spending in the pandemic era and increased borrowing but RBI’s balance sheet expansion cannot continue forever in the same manner and debt management should be one of the priorities for the government. The pandemic is still not over and therefore the low interest regime should continue to push the growth as governments alone can’t shoulder the expansion.
(The writer is a Chartered Accountant, and public policy analyst. The views expressed are personal.)
