By Anjan Roy
The latest GDP figures show that the Indian economy is slowing down. The last quarterly figures indicted national income grew by 4.4%, which was lower than in the preceding two quarters.
This was immediately ascribed to the hikes in interest rates by the Reserve Bank for almost a year now by as much as 2.50%. Some have even argued that the central bank should now evaluate the impact of its stance of stricter monetary policy regime to control the runaway prices.
Indeed, the prices have been rising, no doubt. The principal responsibility of any central bank is to ensure a smooth price situation. Inflation control is a primary objective of the central bank and whatever it takes to achieve that aim, it should not dither from it.
But the argument runs that the RBI should weigh the costs of its inflation control stance. A harsh monetary policy resulting in the secular slow down of the economy could create more hardship for the people and damage the economic prospects. So why not tolerate a little more of inflation than introducing a lower growth trajectory.
It is a hard choice between lower growth momentum and lower price rise. Lower growth means that ultimately it will create fewer new employment opportunities and thus ad to incomes. In the worst situation, lower growth, leading to a recession, could even mean loss of employment. That could be the last bargain.
Needless to say, RBI governor, Shaktikanta Das, is well aware of this dilemma and he has referred to it time and again in course of his many monetary policy statements. The choice for the central bankers is nothing new and it is raised every time the prices are elevated and the economy is none too strong.
For the Indian economy, consumer price inflation is rising fast and already a tad higher than its tolerance band of 4% plus minus 2%. This calls for action, particularly when the inflation levels are very much elevated for much of the world. The continuing Russian war in Ukraine has been held to have directly pushed up prices all over the world.
Ukraine war has particularly hurt the balance in the global energy markets and the trends and instability in energy prices is fuelling prices all around. While the world had got used to a low inflation regime for over a decade, now it is facing stiffening prices. Fuel price hike, along with the real scarcity and rising prices of food, are proving to be lethal combination for ushering in an era of miserable existence for millions across the world.
A good part of current Indian inflation is being driven by these international trends. Fuel prices, which are basically determined in the global markets, cannot really be controlled by domestic Indian authorities. Earlier, the fuel price hikes were cushioned with an administrative mechanism. It had turned out to be impossible to run when prices were running haywire.
The present domestic fuel price regime is linked to global market prices and hence the domestic costs of fuel are dancing in tune with the global ones. But these are fast approaching intolerable limits. The global oil market specialists are predicting a price level of $100 per barrel in the near future.
Hence, imported fuel driven inflation is impossible to avoid in times like these and we must prepare for it.
In case of food, we are far better off. Past are the days when we were dependent on food imports. Now, thanks to the successful turnaround in farm economy, we are often the supplier of vital food items to the world. Indian inflation has thus changed in nature. Our inflation is no longer driven by food grains prices, as previously.
Instead, these are driven by the prices of fruits and vegetables, and of course, protein prices like those of eggs or fish and meat. Another typical feature of Indian inflation is that the prices of pulses are a critical determinant in the food basket.
Any inflation is bad, whether driven by domestic factors or imported ones. So fuel inflation could be as much damaging as rise in vegetables prices in the country. These determine the hardships that people face in their daily living conditions.
In a speech before the Brunswick Group’s Cost of Living Conference in London this week, the Bank of England governor, Andrew Bailey, has made a lucid statement on how the British central bank seeks to formulate its monetary policy keeping in mind the hardships the general public is facing over rising prices.
Central banks invariably have highly sophisticated bands of economists and econometricians developing models of the state of play, they do predict possible courses of growth and price behaviour. They look not liquidity corridors win the financial markets and simulate impact of tinkering with policy parameters. But beyond these there are realms which need to be taken into account to formulate policy responses in given situations.
Apart from looking into various data on financial markets, economic variables, fiscal trends and global developments, the bank makes conscious efforts to meet people’s groups to ascertain what problems they were facing.
In course of his peroration, Mr Bailey gave a glimpse of what length he would go himself to ascertain the hardships ordinary folks were facing in their daily grinds. He underlined the importance of such ground level feedback in formulation of monetary policies.
Maybe, there could some justification in making economic policy formulations more grounded in social feedbacks from people than merely mere number crunching and abstract formulations. After all economics is common sense and judgement calls rather than trying to frame it like an exact science.
After all, the best commentary on economics as an exact science had come from a simple question. Following the global financial melt-down in 2008, Queen Elizabeth had addressed a room-full of top globally acclaimed economists with a simple opening question: how could none of you such erudite economists could foresee such a devastating crisis coming.
The queen was greeted with silence. (IPA Service)