Inflation: The State steps up

  • The government’s announcements to tackle inflation were both adequate and considered
Beyond the usual polemics about the timing and adequacy of the measures, there are some interesting aspects to them. (HT Photo/Representative Image) PREMIUM
Beyond the usual polemics about the timing and adequacy of the measures, there are some interesting aspects to them. (HT Photo/Representative Image)
Updated on May 22, 2022 07:37 PM IST
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ByHT Editorial

The government’s announcements on Saturday to tackle inflation are as welcome as they were surprising. Beyond the usual polemics about the timing and adequacy of the measures, there are some interesting aspects to them. One, the government seems confident that it will be able to rein in inflation — to around the upper band of the Reserve Bank of India (RBI)’s comfort level — and restore growth to some point on the trajectory it was on before the Russian invasion of Ukraine. The confidence perhaps stems from certitude about the country’s macroeconomic dynamics, and while it is, at this point in time, still the minority view — most analysts expect RBI to revise downward its projection for 2022-23 Gross Domestic Product (GDP) growth, and, upward, its inflation estimate for the year when it meets in June — it is both plausible and likely. Two, despite the enhanced spending on the fertiliser subsidy and the revenue loss on account of the excise duty cut on fuel, the fiscal deficit for the year is unlikely to increase. This is on account of the government’s revenue estimates in this year’s budget being conservative and inflation, which increases the country’s nominal GDP.

Three, the interventions are clearly aimed at undoing the impact of inflation — and just that. These are not broad-brush efforts at boosting demand, which will heat up the economy further (something India can ill-afford at this stage). They simply seem aimed at taking consumer sentiment (and disposable incomes) to the levels they were at in February. And they are definitely aimed at reducing input prices for companies. Given that the economy’s recovery was led by the organised sector, which, in turn, was driven by profits, the government may believe it has done enough to turn the clock back. Finally, the measures send a message to Mint Street that it is not alone in its fight against inflation. With the current wave of inflation not being driven by demand, the effectiveness of monetary measures to address it was always suspect. Saturday’s announcements, apart from reassuring RBI that the government is doing all it can to reduce inflation, may convince the central bank to either not increase the policy rate when it meets next, or reconsider the quantum of the increase. That, in turn, will help the cause of growth.

The measures, if they work, will not change the nature of the recovery (it will continue to be K-shaped), with smaller firms and those at the bottom of the pyramid continuing to be on its margins, and there may be surprises in store — such as a poor monsoon, or a patchy one (which is normal but with a distribution that doesn’t help farmers). But, for now, the government’s response to the questions asked of it looks considered and adequate.

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Friday, July 01, 2022