Table of Contents
What’s happening?
- India is now facing a dual problem of low growth and high inflation.
- The recovery has proved much weaker than expected, with growth amounting to a meagre 4.1% in the fourth quarter of 2021-22.
- At the same time, inflation has been surging so much so that over the past few weeks the government has taken a wide range of measures to deal with it.
- Unfortunately, this strategy is misplaced.
- The government’s actions will have only a marginal effect on inflation, while they may do significant damage to the incipient recovery.
- The government needs to step back from the inflation fight, and instead encourage RBI to tighten monetary policy.
inflation
- CPI inflation was close to 8% in April, nearly double RBI’s legally mandated target of 4%.
- Most of this inflation is caused by supply-side bottlenecks, triggered first by the pandemic and subsequently by the Russia- Ukraine war and lockdowns in China.
- Yet even as supply has been constrained, RBI has been pursuing an easy monetary policy, aimed at encouraging demand.
- As a result, inflation has been increasing.
- With inflation surging, and RBI still in “accommodative” mode, the central government has now announced a slew of measures to ease the supply constraints, Focussing on those commodities whose prices have increased sharply.
- It has banned wheat exports, lowered the excise tax to Rs 8 per litre on petrol and Rs 6 per litre on diesel, and reduced the import duty on steel.
- That’s not all. The government has also imposed an export duty on steel products at the rate of 15% and increased the export duty on iron ore from 30% to 50%.
- It has imposed a cap on sugar exports. There is a demand to ban cotton exports as well.
- It is clear that the government is trying hard to bring down the cost of commodities.
What experts say?
- But these actions will only have a modest effect on inflation.
- Part of the reason is that price increases are no longer confined to just a few commodities.
- Inflation is now broad-based, extending to virtually every good and service in the economy.
- Further inflationary pressure is building up, as seen from WPI inflation of 15%, the highest in more than two decades.
- As these wholesale price increases are passed through to the retail level, CPI inflation could rise further.
Why will it have damaging effect on Economy?
- India now faces a historic opportunity to use exports as a lever to boost GDP growth.
- China, the main exporter, has been locking down its factories even as international firms are scouting for new production locations.
- Meanwhile, Russia is being subjected to ever-tighter economic sanctions.
- As a result, two large countries are reducing their presence on the international trade landscape, creating an unprecedented scope for India to attract international firms to produce and export from here.
- Exploiting this opportunity requires an appropriate policy stance.
- Perhaps the single most critical element of such a stance would be a stable and consistent trade policy.
- Whenever the government suddenly bans exports or imposes export duties, it puts firms with export orders in a position where they cannot fulfil their contracts.
- This is not only embarrassing, it also exposes both exporters and importers to large losses.
- To avoid this situation, domestic firms will shy away from entering the export business, while foreign firms will be reluctant to place orders with Indian firms.
- In addition, multinationals will be discouraged from shifting their production to India.
- After all, why should a firm relocate here, if there is a risk that its exports could be banned, its imports subjected to high duties, and the rules governing its sector changed overnight?
- Finally, the government’s actions will affect growth in yet another way.
- The reduction in excise taxes on petrol and diesel will deprive the Centre of revenue at a time when the budget deficit is already far too large.
- That means the government may need to compensate by cutting spending on infrastructure projects that are vital for the nation’s development.
Role of RBI
- At this crucial juncture, macroeconomic policy has the delicate task of simultaneously tackling inflation and promoting the recovery.
- The first task is the job of RBI. The central bank must take full responsibility for its actions so far, sending a clear signal that henceforth it will focus on bringing inflation down without
- getting distracted by any other objective.
- The government on the other hand needs to focus on growth.
- It needs to reduce market interventions, eliminate prohibitions, and dismantle trade barriers, so that firms are incentivised to export and invest.
- If instead, we continue to get the policy “assignments” mixed up, we will end up with objectives that are mixed up.
- That is, instead of entrenching growth and derailing inflation, we will derail the recovery and entrench inflation.
- That would not just be a policy mistake. It would be a recipe for a crisis.
Q) The meaning of disguised unemployment is?
- Zero marginal productivity of labour
- Zero total productivity of labour
- Zero average productivity of labour
- None of the above
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