Opinion

The RBI stuck to the script, rightly so

A SESHAN | Updated on November 25, 2017

Inflation still bites The answer lies in farm breakthroughs

A standstill policy seemed inevitable. However, the acceptance of a ‘new normal’ for inflation is disturbing

The Reserve Bank of India has done well in not making any changes in its policy except for some minor tinkering. Whether on the domestic or the external side, the trends are satisfactory in relation to growth, inflation and balance of payments. A monetary policy report has been issued along with the policy statement that will require detailed analysis at a later point in time.

There are certain overtones in the policy statement that are partly encouraging and partly discouraging. In the first place, although the RBI and the Government have not formally disclosed their acceptance of the recommendations of the Urjit Patel Committee Report on monetary policy, it was evident on the last occasion that the consumer price index (CPI), and not wholesale price index (WPI), will form the reference for policymaking.

This is further reinforced by the near absence or downplaying of any reference to the WPI, either in the documents or in the conference with researchers and analysts that followed the Governor’s statement. This is encouraging.

But what is discouraging is the reference to the ‘medium-term objective’ of 6 per cent inflation (Para 9 in Governor’s statement). For a long time, it used to be 3 per cent while the short-term one was 5 per cent.

Basically inefficient

Does it mean that 6 per cent is the new normal for inflation, a fear expressed by me (“A new normal for inflation?”, August 5, 2014) after the last policy announcement in August 2014?

The RBI refers to the fact that the sustained nature of inflation is due to high food prices, particularly cereals. It is only a reflection on the quality of management of government since the warehouses of the Food Corporation of India and State governments are bulging with stocks of foodgrains with considerable wastage. What can monetary policy do to deal with such inefficiency?

Over the years, the RBI has accepted some of the recommendations made in this column.

Thus it stopped referring to busy and slack season policies after it was pointed out that the distinction no longer held good and the economy was busy throughout the year due to the following reasons: the decline of the agricultural sector in contributing to gross domestic product, the emergence of sectors such as petroleum that did not depend on agriculture for raw materials, the increasing importance of the rabi season vis-à-vis the kharif season even in agriculture with foodgrains produced in the former accounting for nearly a half of the total, unlike in the earlier periods when it was 25 per cent to 30 per cent, making seasons less marked in the sector, and the rising industrial and service sectors operating throughout the year.

Core inflation

The inappropriate use of ‘core inflation’ used in the West was given up after it was pointed out that the headline inflation in the CPI should be considered as the core of the problem facing the policy maker in India.

However, the RBI has continued with the ‘base effect’ as an explanation for inflation trends. Generally one does not find any reference to this in the policy statements of central banks of Western countries. The explanation still continues with RBI analysis but the Bank has taken note of the criticism to present a box item on the subject in the monetary policy report. There is a reference to a study in ECB Monthly Bulletin (January 2005) that needs to be looked into to understand the RBI’s view on the matter.

For the first time in the recent period, the Bank has come out with some discussion on liquidity and its drivers in response to a suggestion. It is heartening to note the good response of the RBI authorities to suggestions and criticisms, albeit with a lag due to institutional inertia.

Even as the Bank starts working on the next policy announcement due on December 2, it should do some fundamental work on the growth versus price stability dilemma. Growth is rightly conceived as a function of investment and hence the role of interest rates vis-à-vis the internal rates of return is well recognised. But it relates to capital equipment and projects and their enduring medium- or long-term effects on the economy. But there can be growth in the short term even without investment as, for example, in the case of agriculture if the rains are favourable.

Agriculture impetus

The Green Revolution, based on high-yielding varieties of crops that responded well to chemical fertilisers, was no doubt facilitated by the extensive investment in minor irrigation works like the installation of tube wells.

But there are still pockets in the economy that contribute significantly to agricultural production and are blessed with good rainfall generally. What we need is a second Green Revolution that will be successful on the basis of new high-yielding varieties for such crops as pulses, drought-resistant varieties, dry farming, etc. Our agricultural scientists are doing good work but unfortunately they get less recognition and appreciation than the rocket scientists.

What is more distressing is that there is no adequate extension work to carry the fruits of research to the farm. During my higher studies in agricultural economics. I personally saw the close coordination between researchers and farmers in the US, thanks to extension that contributed to farm surpluses.

To me, reaching the Mars is no doubt a great achievement but making the farmer succeed in raising his crop in a season of drought is more exciting and contributes to growth immeasurably.

(The author is a Mumbai-based economic consultant)

Published on September 30, 2014

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