A tight monetary policy shall be counter-productive for India since it will impact the investment rate and public income, which the nation can’t afford
Unlike developed economies, in India, there is no direct linkage of repo rate with inflation, as is evident from the data available from the past several years. In the developed economies, consumer loan portfolio is too large and the interest rate is much lower. Hence, for controlling inflation, they increase their interest rate for cooling off the consumption demand and the money is diverted to financial savings. In India, however, the interest rate is higher and the financial savings are driven by tax incentives. More so, the major portion of bank deposits is used for meeting the investment needs and the financing fiscal deficit. Hence, tight monetary policy shall be counter-productive, since it would impact the investment rate and public income (GDP) which India can’t afford, particularly after the recent sufferings in the COVID-afflicted years. Rather, high interest on the productive sector will add to cost-push inflation.
The key factor for current inflation in India is the “cost-push effect”, that too in a compounding manner. For this, the cost of basic inputs such as capital, energy, minerals and logistics must be reduced; that gives a multiplier effect.
India must come out from its past legacy of living with “high cost economy” causing inherent and chronic inflation. This can be resolved only through structural reforms and appropriate policies on the regulatory and fiscal fronts. Eventually, it will also boost exports and arrest weakening of the rupee, which adds to inflation, and vice-versa.
The price of domestic “thermal coal” must be restored almost near to the 2019-20 level which has since increased to more than three times, mainly due to stagnant production clubbed with high price of imported coal. Its major impact is on the core sectors such as power, steel, metal and cements, which travel to the entire gamut of production of goods and services.
Hence, India must immediately increase the domestic production of coal by at least 15-20 per cent through regulatory easements. This has been almost stagnant in the past few years despite having huge reserves. India should give incentives by reducing the royalty and auction premium on the incremental production. Eventually, that will cut import of coal and save forex. Particularly, uninterrupted power at cheaper cost shall immediately reduce inflation of all goods and services.
Modern industrial economy is highly dependent upon the availability of minerals at cheaper cost. Allocation of mineral resources and coal through auction is certainly one of the good reforms in 2014-15. But the levy of auction premium percentage on the IBM price (including the auction and royalty) causes compounding and spiralling effect on the selling price. In consequence, the prices of power, steel, metal and cement have inflated to record high levels. Unfortunately, the mineral sector has been over-regulated since long, causing low production with high cost, which must be eased. The prospecting of new reserves of minerals must be done in an aggressive manner for future security.
Logistics cost in India is about two to three times compared to several other countries. Considering our nation’s high dependency on road and surface transport, the taxes on diesel may be rolled back near to the 2014-15 level. As a long-term solution, the Railways must build sufficient capacity and increase the share of goods traffic compared to road transport, which is not so cost efficient. Eventually, that will reduce our dependence on imported fuel. This step is overdue since several years.
Unlike manufactured products, food items are produced in the harvest season and then consumed until the next season arrives. During the interim period, it is to be stored and then used as per the need. Stemming from this reason, the development of warehouses and cold storages at affordable rent shall reduce seasonal inflation. Processing of perishable produce shall also help in curbing any steep hike in the prices of food products during off season. Advance forecast of production and consumption, clubbed with predictable policy for export and import, shall avoid price shocks and motivate farmers to go in for higher production. It will, naturally, help check inflation, too.
Unlike several other nations, India has a vast potential to produce most of the commodities in surplus, in excess over the domestic consumption except in a few cases. This potential must be unlocked through reforms and the surplus production should be exported in a calibrated manner. One believes that the ongoing high inflation of commodities in the world should not be viewed as any sort of impediment. India should convert this challenge into an opportunity for boosting its production and exports. By carrying out this activity, the import of such commodities, which are already in shortage for reasons beyond our control, can be imported in a calibrated manner.
By and large, the “economic efficiency” of India needs improvement through structural reforms surmounting the past legacy. Direct tax such as GST, excise, custom duty, mineral royalty and mineral auction premium also needs rationalisation for reducing the multiplier impact. That will check inflation to an affordable level and also boost the GDP’s growth. Yes, if the inflation is arising due to consistent surge in consumption demand, monetary tools must be kicked in till the supply gets back in tune with the demand.
(The writer is an economist and an author. The views expressed are personal.)