Viewpoint: The inflation roadblock

06 DEC,2020 | MEDC


 

Persistently high inflation poses the single biggest hurdle to the long-term growth prospects of the Indian economy. Throughout the year, inflation has been hovering above the RBI’s comfort zone of 2-6%, and India is one of the few major economies to be affected so severely by it. High inflation does not leave the RBI much scope to cut interest rates, and that is not good for the long-term global competitiveness of the economy. High inflation also reduces disposable income for the masses as they have to pay more to purchase the same set of goods and services they were earlier availing of. India is probably the country where persistently high inflation hits those at the bottom of the pyramid harder than anywhere else. This is the single biggest barrier to inclusive and sustainable growth. While a broad-based economic revival will obviously continue to remain the focus of government’s policy for the foreseeable future, the threat posed by inflation cannot be overlooked. On the flip side, inflation is likely to subside in the coming months. As food prices reduce due to a bountiful harvest, and supply chains disrupted by the economy are gradually strengthened, inflation is likely to reduce its stranglehold on the economy. For that, however, there has to be a steady rise in government capital expenditure to ensure a sustainable economic recovery. Luckily, Covid has not affected India’s agricultural sector substantially, and so the foundations of a long-term economic recovery are still intact. In this context, a broad-based rural recovery should be given all possible support. Agriculture (including agro-businesses) continues to remain the backbone of the Indian economy, and there remain some critical areas in it like electricity and water management that need to be carefully worked upon to achieve our long-term goals of sustainable development. Perception plays a key role in inflationmanagement. The persistence of inflation can harden inflationary expectations and make it more difficult to tame it in the future. India is more vulnerable than most nations to a rise in global oil prices, and this is an area needing immediate policy intervention. The development of electric vehicles throughout the country needs to be incentivized, and the supporting infrastructure put in place at the earliest. All this should be carried out in as environmentally-friendly a framework as possible. The aftermath of Covid is likely to add to fiscal stress and expose the weaknessesin our financial system. The strains on globalization and the growing mistrust of China may also impose additional pressure on supply chains, with a detrimental effect on domestic inflation. As long as inflation is not reined in, consumption will not revive, and that will impact our long-term growth prospects. The bottom-line is clear … as long as inflation cannot be controlled, a sustained economic recovery cannot be assured. 

*Photo Credit: Google

 

 

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