With aggressive inflation targeting, Modi has snubbed Sangh Parivar
Right at the time when monsoon rains flooded major parts of north, central and east India, the Narendra Modi-led government made a tryst with the new era of inflation management. The government notified an inflation target of four per cent for the next five years, which the proposed Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will have to achieve through its interest rate manoeuvres.
With an aggressive inflation targeting and a hawkish stance on borrowing rates, the government has explicitly snubbed the swamis and gurus of the Sangh Parivar and vindicated the Raghuram Rajan doctrine of monetary management. The sharp upward bounce in consumer and wholesale inflations has only made urgent the need of having inflation targeting.
Going by recent policy developments and musings of the prime minister, it is clear that the government has now come to terms with inflation. As the monetary policy framework is already in place, and a better monsoon comes handy, it is the right time for Prime Minister Narendra Modi to initiate supply side reforms, those he advocated as Gujarat's chief minister.
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| India's inflation has become a complicated, obstinate and multi-dimensional phenomenon. |
The recent history of inflation (after 2008) shows that successful monsoons have not played an effective role in curbing food inflation, though bad monsoons do aggravate the difficulties. Over the last five years, the worst inflation has come in the shadow of good monsoons. Therefore, it is highly unlikely that long-term gains can be achieved from good monsoons beyond a temporary relief in food prices.
The wage board-driven rise in the salaries of Central government employees is all set to fuel consumer inflation. Going by various estimates, the market may witness an additional consumption of Rs 45,000-50,000 crore on account of heavy pay packets for government officers. States will follow the wage board course and add more gas to inflation. The ever-growing tax rates are driving inflation from policy circuits. Service tax grew consistently in the last three Budgets. The surge in rail fare, phone bill, internet and school fees are in addition to that. Together, they have increased the cost of living considerably over the last two years.
The greatest concern over the Goods and Services Tax (GST) is that if the states and Centre's revenue concerns are to be kept in mind, GST rates may push inflation to new heights. In the run up to the 2014 Lok Sabha elections, Prime Minister Modi preferred inflation management through the increased supply of essential goods over the reducing demand that is money in circulation. As the chief minister of Gujarat, Modi had chaired a committee to find ways of controlling price rise. It had submitted a report with 20 recommendations and a 64-point action plan, which was based on the idea of increasing supply of foodstuffs.
The Modi committee had recommended that mandi laws had to be done away with to increase inter-state supply of food products. Modi has powerfully pushed the idea of dividing the Food Corporation of India (FCI) into three parts by creating three separate entities for purchase, storage and distribution. The third most significant recommendation was focused on extensive liberalisation of the agricultural market.
However, the Modi government has not been able to implement even one of those reforms in the last two-and-a-half years. Soon after coming to power, the government had tried to implement model the Agricultural Produce Market Committees (APMC) Act, which would have unshackled the markets. The outdated APMC Act forces farmers to sell their produce only to middlemen approved by the government in authorised mandis or markets.
Therefore, a big retailer cannot directly buy from farmers and both the parties have to essentially go through a broker in mandis. However, except Maharashtra's reasonable success, no other major state has consented to this reform. The Modi government's mega project for integration of state mandis with the e-market (e-NAM) has not taken up speed as states are required to complete certain necessary reforms in their respective APMC Acts.
As far as the FCI's restructuring is concerned, the Shanta Kumar committee, formed by the prime minister under the former Union food minister, rejected the idea of dividing the FCI and thus the reforms in the food management and supply system got shelved forever.
Whatever the critics may say on inflation and the hawkish stance of the RBI, the prime minister is well in sync with political risks of price rise. In his recent speech at a political rally in Gorkahpur in Uttar Pradesh, Modi said, "Inflation is a frequent subject of discussion in the country, but when the government takes good decisions, nobody discusses it."
Indeed, despite several good initiatives, inflation has wrecked the political message of "achhe din aaned wale hain" (good days are coming). In the last two years, the government has not come up with a credible strategy to reduce inflation even though the international situation (falling prices of crude oil and commodities) has stayed in favour of India.
It is important to create a strategy to demolish perpetual expectation of inflation more than dealing with the seasonal price tantrums. As global commodity prices are firming up again, it is high time for the government to take up the pending reforms that increase supplies in the markets. That is the only way to avoid a political debacle led by deleterious inflation.