NEW DELHI: Interest rate adjustments and other monetary policy tools may become less effective in tackling inflation as supply shocks increasingly shape the global economy, Chief Economic Advisor (CEA) V Anantha Nageswaran said on Friday, arguing that fiscal and other public policy measures would need to do more of the heavy lifting.
“Raising interest rates will not solve supply-induced problems. If anything, it may even be counterproductive,” he said, pointing to a world increasingly facing supply-driven inflation.
Speaking at the 9th Annual Food Systems Dialogue, Nageswaran said inflation targeting would remain a policy framework in a supply-constrained world, but countries would “take creative liberties with it” and could abandon it if it became a serious constraint.
His remarks came a day after the data released by the National Statistics Office showed that India’s retail inflation breached the Reserve Bank of India’s upper tolerance limit of 6 per cent in October for the first time in two years. The RBI’s Monetary Policy Committee is widely expected to raise interest rates by another 25 basis points at its December 2-4 meeting.
Economists agreed that interest rate increases alone cannot address supply shocks, though they differed on the scope for monetary policy to contain inflation.
Madan Sabnavis, chief economist at Bank of Baroda, said higher interest rates could neither increase food supplies nor bring down oil prices. In the case of crude oil, he argued, policy intervention had limited scope to lower prices.
“If crude oil is creating problems, no policy can bring down prices. None, including public policy, unless the government is taking on a heavy subsidy,” Sabnavis said, adding that the government’s fiscal constraints made such an intervention difficult.
Madhavankutty G, chief economist at Canara Bank, said monetary policy remained relevant because it anchored inflation expectations, even as supply-side factors played an outsized role. “Monetary policy is largely ineffective in controlling supply-side inflation, such as a surge in crude prices due to geopolitics. But demand-pull inflation, seen in rising costs of health, personal care and education, and in money supply growing 12-13 per cent a year, cannot be ignored,” he said.
Nageswaran said the Covid pandemic had brought an era to an end, with the world moving away from globalisation and integration towards segmentation and fragmentation. “Supply shocks will dominate the world in the next 25-30 years,” he said.
The CEA added that while demand would grow slowly, supply shocks would recur across the world, often by design, as countries weaponised supply chains and strategic choke points.
Calling for a rethink of development priorities, Nageswaran also argued that agriculture needed to re-emerge as an engine of growth. “In the post-Covid world, agriculture has to come back as a driver of growth,” he said.
The familiar progression from farms to factories to services was under strain, he said. Manufacturing faced the challenge posed by China, which treats the sector as a strategic priority and mobilises the full weight of the state behind it. Services, meanwhile, faced the disruptive effects of artificial intelligence (AI), which threatens entry-level jobs that traditionally provide the first rung of a career ladder, as well as tighter immigration restrictions abroad.
Agriculture, by contrast, was “mostly in your control”, he said, while clarifying that this was not an argument against manufacturing. All three sectors, he added, needed to be pursued together.
Also speaking at the dialogue, Saurabh Garg, secretary at the Ministry of Statistics and Programme Implementation (Mospi), said reliable data was the foundation of resilient, inclusive and sustainable food systems. The focus, he said, needed to move beyond measuring farm output to understanding the entire food system, including farm productivity, farmers’ livelihoods, consumption, nutrition, prices, employment and environmental sustainability.
India’s agricultural data ecosystem was rich and expanding, Garg said, but the next step was to make the data more usable by moving from availability to intelligence. This would require machine-readable, interoperable and AI-ready data built on common standards, enabling AI-driven analysis, stronger research and better-targeted policies.
Source: Business Standard
