INDIA NOT HEADING FOR THE HIGHWAY IN CONTROLLING THE CREST

The covid-19 pandemic, the Russia-Ukraine war, and now climate change have sequentially posed a serious threat to global commodity prices. Prices in one country have been following a ripple effect penetrating the trading partner’s economies. The United States Government’s move is the most observed in the given setting as the Fed had constantly been acting on pushing interest rates since the last quarter of 2021. Attempts to contain inflation within the healthy 2% failed to meet the expectations with the current level of inflation reaching 8.26%. Developing countries following the same path of modulating monetary policies wouldn’t be the most feasible solution here.

In the case of India, it needs to be visualized through a subjective lens, instead of as a follower of the US economy. We have a relatively lower employment rate defined by negligible private capital investment, a lethargic recovery from the pandemic, and being negatively accompanied by the surging fiscal deficit standing presently at almost 6.4% of the estimated GDP in 2023. The social and unemployment support programs function with loopholes, making them very permeable, unlike the ones in Europe and US. Individuals’ ability to endure economic shocks becomes less likely with the per capita income in India being 10% of the US’s figure and 15% of the EU levels.

After being considered the most effective, even monetary policy alone isn't enough, to control the inflation levels and bring economic balance. Therefore, fiscal, trade, tariff, food, agriculture policies, and infrastructure policy (multiplier of 2.45) should be structured, since they align with the monetary policy. Lockdowns with supply chain disruptions caused due to the Russia-Ukraine war have flared up food prices which make up almost 45.86% of the CPI basket. Food articles and essential commodities demand increased in the recovery post lockdown resulting in demand-pull inflation. As this inflation was taking a backseat, the war led to a surge in the cost of crude oil, a significant component of global supply chains, port congestion, and expensive shipping resulting in new cost-push inflation.

Curbing the impact of inflation on the economy by regulating the interest rates was one of the most effective options since inflation has the potential of driving away foreign investors whose withdrawal can significantly reduce the value of GDP. If that happens, foreign exchange reserves will have to be used to control depreciation to prevent the withdrawal of FDI. Hence maintaining inflation in bandwidth was considered critical.

The Finance Minister offered a non-monetary policy mechanism as the solution to tame inflation. Reducing budget deficit can be one measure to achieve a middle-ground between constraining burgeoning growth and using monetary policy as little as possible. Since the time taken for the monetary policies to take effect is lagged, other factors can act behind the scenes. In terms of levying tax on inflation-triggering commodities such as petroleum, the Union and State governments can form a consensus to avoid tax gouging. To achieve this, petroleum can be brought under GST.

The Indian government, instead of following the dominant economies’ strategy, had taken its way in controlling inflation and simultaneously preserving the GDP growth. Development of infrastructure provided a massive boost which had an immense multiplier effect on GDP, along with stimulating consumption demand. A strategic combination of initiatives taken by the government, aided by elastic monetary policy, fall in global commodity prices due to easing supply chain constraints have in combination helped in reducing the inflationary pressures in India.

For inclusive and balanced growth, the public policy's focus needs to be shifted from subsidies to investment in the countryside to generate employment, upgrade rural infrastructure and boost the competitiveness of agricultural and MSME sectors. With this, the produce from the sector will increase and be more stable which will improve the response of supply and control food inflation.

Asset monetization, on the other hand, is found to control the amount of debt and debt servicing thereby pulling down the risk premiums and boosting the economy’s credit rating. With this public spending would escalate which in turn will make capital cheaper for the private players, thereby setting off a loop of development. Hence India would be exhibiting an example for developing countries to follow.