Placing India’s monetary policy in a perspective is difficult as far as its singular target of inflation control is concerned. It is unclear whether the recent hike in interest rates by the Reserve Bank of India (RBI) should be a cause of concern or celebration. From the common man’s perspective, the effort to bring prices down is appreciable. Facts, however, tell that a higher revision of policy rates of over 10 times since March last year has not curbed spiralling prices.
From the perspective of industries, this has indeed curbed economic activity, leading to lower production. While there is no definite figure on subsequent wages or employment hit, there is little to believe otherwise. In its game theory parlance, that’s a ‘lose-lose’ situation.
Transmission mechanisms of monetary policy have not worked and it’s no surprise why. The biggest rise in the wholesale price index, the official measure of inflation, is owing to the higher energy prices comprising mainly fuel, which the government has left open to international pricing. The continuation of fuel subsidy was possible with certain manoeuvres, but that is a foregone choice.
Coming to food, prices beg control by supply side intervention and curb on commodities trading, which, incidentally, agriculture minister Sharad Pawar finds necessary. So while basics of the index are prone to external command, efforts to tilt the index by the RBI have plummeted industrial activity. This would mean higher inflation for people hit with wage and employment cuts.
Perhaps there is more to inflation check than textbook canards and a credit squeeze may, on the contrary, transmit inflation. If home loans are expensive, won’t limits on housing space make the existing real estate costlier simply because it falls short of supply in relation to demand?
The need is to accept a few facts instead of hurting growth for a fictitious cause. Credible research points that even a two-digit inflation rate might be unavoidable in an emerging economy. It should then be imaginable that some people need to be buffered against food and essential goods inflation while others should pay a higher price for non-essential consumption. And that can be defined.
Without buffers or safety nets, no amount of rate adjustments will help, even though it will halter the growth rate. The net effects will have political consequences. While the quantity theory of money, which guides monetary policy, may be heresy, the fact that people vote for their pockets is dogma.