November 8, 2022

Good morning. In today’s either/view, we discuss whether the Reserve Bank of India has done enough to control inflation. We also look at the caravan tourism troubles in Kerala, among other news.

📰 FEATURE STORY

What Has The RBI Done To Tackle Inflation?

As currencies continue to depreciate with a potential recession looming in different parts of the world, inflation has been at an all-time high in India. The Reserve Bank of India (RBI), the central bank of the nation, has been grappling with keeping inflation in check amid global economic chaos. While other countries are still grappling with the issue, how is the RBI faring so far?

Context

India established a flexible approach to target inflation in 2016. The Reserve Bank of India Act was revised by the Finance Act of 2016 to provide price stability as the primary goal of monetary policy, the Consumer Price Index (CPI) as the anchor, and a Monetary Policy Committee (MPC) as the institutional structure for setting the policy rate to meet the inflation target.

Following the Covid-19 outbreak in 2020, headline inflation had remained above 6% for 11 months, which was beyond the upper ceiling of RBI’s mandate of containing inflation at 4% with a 2% leeway either side. Conventionally, RBI Governor Shaktikanta Das’ first dispatch should have arrived last year, but the government is said to have saved him by rejecting the April-June 2020 inflation statistics as being inappropriate for computation.

The Ukraine war and the subsequent oil price shocks sent headline inflation soaring once again this year, breaching the target and triggering the need for an explanatory letter. But Das last month noted that any such communication would remain private between RBI and the government. This is a departure from global central banking practices.

VIEW: RBI is keeping inflation in check

The MPC raised the repo rate by a total of 190 basis points from 4% to its current level of 5.9% in an effort to curb inflation. The real economy experiences some delay in the transmission of monetary policy rates. Inflation measured by the CPI was still high in September at 7.4%.

The MPC is anticipated to keep raising interest rates and eventually bring the terminal repo rate to a range between 6.5-6.75% as part of its ongoing strategy to control inflation. For 2022–2023, inflation is predicted to be around 6.7%, with some decrease in the second half of the financial year. However, inflation is predicted to decline to roughly 5.1% in 2023–2024 due to easing momentum, regular monsoons, and falling global commodity prices.

The RBI’s priority up until February of this year was recovering growth. The trajectory of the policy has changed since then. The RBI started discussing withdrawing accommodation while still being accommodating in the April policy. The MPC statement renounced its “promise to remain accommodating” in the June policy. Since then, the emphasis has turned to the “removal of accommodation” in order to maintain the target inflation rate.

Apart from these measures, the RBI has valid arguments for inflation. The central bank was proactive in raising rates even between two policies, as it did in May when it saw things were getting out of hand post-Ukraine war, and there have been some measures like the increase in goods and services tax (GST), which has added to inflation that was happening in parallel. Inflation has been primarily caused by supply-side shocks, with global commodity prices having an impact.

COUNTERVIEW: RBI failed to rein in inflation

While all these have, indeed, furthered inflation, it could be observed that the RBI has been behind the curve from the start. The MPC set a 4% inflation target, a 6% upper tolerance, and a 2% lower tolerance. The inflation target has, however, for the first time between January and September, remained above the MPC’s upper tolerance for three consecutive quarters.

Since implementing the Flexible Inflation Targeting (FIT) system in October 2016, the RBI had never fallen short of the 4% target, with a 2% margin of error on each side until the pandemic. The RBI’s directive was disregarded. The primary mission assigned to the central bank was to reduce inflation, with the secondary goal of fostering growth so long as inflation was kept in check.

However, the RBI functioned as though it had the following three additional goals: First, it engaged in “exchange rate targeting” to sell a sizable chunk of its foreign exchange reserves in an effort to stem the rupee’s drop. In order to help the government pay its budget deficits (“fiscal dominance”), it also aimed to keep interest rates on government securities low. Three, it made an effort to give the government a lot of dividends.

Additionally, although the Ukraine war seems to be a significant contributor to inflation, data shows that the problem emerged long before Russia’s invasion. The data demonstrates that since October 2019, monthly inflation has exceeded the RBI’s target of 4%. In other words, the inflation objective has only been met imperfectly for almost three years. In fact, since October 2019, 18 of 32 months (or 56% of the period) have seen inflation rise above the RBI’s 6% cap.

Reference Links:

RBI likely to cite supply side constraints, geopolitical tension for high inflation – Money Control
RBI measures controlled inflation, but challenges remain say economists – Business Insider
How RBI’s inflation targeting regime has had a stabilising influence on price rise in India – The Print
RBI fails inflation mandate – The New Indian Express
On inflation, how the RBI failed, why it matters – The Indian Express
RBI can argue its case on inflation control say experts – Business Insider

What is your opinion on this?
(Only subscribers can participate in polls)

a) RBI is keeping inflation in check.

b) RBI has failed to rein in inflation.

🕵️ BEYOND ECHO CHAMBERS

For the Right:

Judiciary Is Forced To Cross ‘Lakshman Rekha’ Because of Government Lethargy

For the Left:

Nehru’s 1962 Mistake Was That He Didn’t Understand Force-Diplomacy Relationship

🇮🇳 STATE OF THE STATES

Reduction in farm fires (Punjab) – On Sunday, Punjab registered 599 farm fires which was the lowest since October 25. Strong winds kept farmers wary of setting the stubble on fire. They worried that the winds would lead to the blaze spreading to nearby fields and that the freshly sown crops could catch fire. Punjab Remote Sensing Centre (PRSC) data showed only two districts with more than 100 fires. Mansa registered the highest with 130.

Why it matters: While the winds helped dissipate the thick smog, the Air Quality Index (AQI) still registered in the poor to very poor categories. In the winter, smoke from farm fires can contribute to more than 40% of Delhi’s particulate matter levels. Depending on the direction of the winds, it can help clear the air a little.

Caravan tourism troubles (Kerala) – The highly-touted caravan tourism initiative to help revive the state’s tourism sector has failed to take off in a significant way. Since the pandemic, it has faced unprecedented losses and hasn’t been able to woo investors. There have been delays in getting clearances from departments to set up caravan parks at tourist destinations.

Why it matters: When it was launched in 2001, it received an overwhelming response from stakeholders. However, it hasn’t progressed much since. Currently, only 9 to 10 caravans are operational by private players. Initially, more than 100 private investors were interested in the idea. The caravan policy doesn’t mention a single-window clearance system to invest in the project.

Land disputes overwhelm district courts (Bihar) – Over the past six months, a team of 20 surveyors across the state’s districts have had to register ongoing land disputes as Chief Minister Nitish Kumar set a 2024 deadline to complete the land digitisation programme. District courts are swamped with disputes about who owns a piece of land. Land disputes are one of the main reasons for crime in Bihar, with more than 3,300 cases last year.

Why it matters: Much of land ownership in rural India is informal and poorly recorded. In 2016, the Centre launched the Digital India Land Records Modernization Programme. While several states have begun the process, progress is slow. Bihar has been conducting the survey since 2011, with more than 96% of the villages yet to be surveyed.

Projects to improve connectivity (Maharashtra) – The Asian Development Bank (ADB) approved a $350 million loan to fund projects to improve the connectivity of key economic areas in the state. The Connecting Economic Clusters for Inclusive Growth in Maharashtra project will develop networks in places like Nashik, Pune, Sangli, and the Satara districts. It’ll involve upgrades to at least 319 km of state highways and 149 km of district roads.

Why it matters: The projects will help connect underdeveloped rural communities with economic opportunities and markets and improve access to health and social services. The project will build on the State Road Improvement Project approved by ADB in April 2020. The project is in line with the state government’s Vision 2030 plan to achieve sustainable and inclusive growth.

Impending dengue epidemic (Assam) – In the state’s Karbi Anglong district, all schools and colleges in Diphu were asked to close due to a dengue outbreak. A statement from the National Health Mission (NHM) said preventive measures were initiated in anticipation of school closures of the Diphu Municipal Board and Greater Diphu Town areas.

Why it matters: 285 cases were detected in the state between November 1 and 5. There have been four deaths recorded in Karbi Anglong. This is the first such instance of a big outbreak in the district. A few cases were reported in the first week of October and kept increasing. Doctors are hopeful that cases will reduce in the next few weeks with the rains now stopped.

🔢 KEY NUMBER

₹4,060 crores – Reliance Industries will acquire German retailer METRO AG’s Cash & Carry India business for a little over ₹4,000 crores. It includes 31 wholesale distribution centres, land banks, and other assets.