Opinion

Up and away

Updated on: May 16, 2022
The rising inflation has fuelled fears of stagflation

The rising inflation has fuelled fears of stagflation | Photo Credit: STADTRATTE

All instruments of monetary and fiscal policy have to be unleashed to combat inflation which is now widespread

The consumer price index for April at a 8-year high of 7.79 per cent raises red flags on various fronts. Inflation has persisted above the upper limit of the Reserve Bank of India’s (RBI) tolerance band for four consecutive months now implying that it is no longer ‘transitory’ and could be turning structural in nature. The price increase has been primarily led by global supply disruption in fuel and other commodities due to the ongoing Russia-Ukraine war and China’s measures to combat Covid-19. While the supply from China could resume once lockdowns are lifted, there is no visibility on the termination of the war yet. The IMF has increased its inflation projection for 2022 to 5.7 per cent for advanced economies and 8.7 per cent for developing economies in the April World Economic Outlook, due to the broadening price pressures caused by the war. Another indication that inflation is likely to persist, is seen in the spike in core inflation to 7.35 per cent in April. Healthcare costs, clothing, footwear, personal care products and other goods and services consumed by households registered sharp increases in prices with companies passing on the higher logistics and input costs to consumers. Transportation and communication index rose close to 11 per cent, having a cascading effect on all goods and services in the economy.

Of concern is the fact that rising inflation could be hurting people in the lower income strata more with food inflation much higher than general inflation, at 8.38 per cent. The 17 per cent increase in oil and fats, 15 per cent increase in vegetable prices and 6 per cent increase in cereals and products will increase the non-discretionary expenditure of households, thus impacting discretionary consumption. It’s probably due to the high food inflation that rural areas have witnessed a sharper increase in prices compared with urban areas; rural CPI was 8.38 per cent against urban CPI at 7.09 per cent. The RBI has been trying to control inflation by absorbing the excess liquidity in the system over the past few months through VRRR auctions, making SDF the operating rate at which banks park their excess funds with RBI, and hiking CRR. According to the Finance Ministry’s monthly report, net liquidity absorption by RBI more than doubled in April 2022 compared with the previous month. The mid-term increase in repo rate by 40 basis points was also done to combat the rising inflation print. But these measures are not enough and the central bank will have to follow through with more rate hikes over the rest of this fiscal year. The monetary policy actions will however impact prices with a lag, keeping inflation elevated in the near future.

There is no disputing that growth will be impacted by monetary policy tightening; companies as well as individuals will postpone expenditure until prices cool down. But the central bank will have to continue prioritising inflation over growth. The government needs to lend a hand in cooling prices through fiscal measures such as reduction in customs duties on agri and metal imports and reduction in excise duty on petrol and diesel. If current conditions persist, the country runs the risk of entering a phase of stagflation; that needs to be prevented at all costs.

Published on May 15, 2022
COMMENTS
This article is closed for comments.
Please Email the Editor

You May Also Like

Recommended for you