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09 AUG,2022 | MEDC
Recent large interest rate hikes by RBI suggest that monetary policymakers are intent on moving forcefully to reduce inflation in the economy. The recent 50 bps hike in the repo rate to 5.4% is the latest step in that direction. Most experts see the repo rate touching 6% before RBI halts further policy tightening. RBI probably wants to play it safe and not put out a lower inflation forecast at this time, to ensure that it remains ahead of the curve in an increasingly uncertain global economic environment.
It is possible that inflation falls faster than RBI envisions, especially if supply chain disruptions ease and global policy tightening results in rapid declines in energy and goods prices. However, inflation risks appear strongly tilted to the upside. There is a real risk that high inflation becomes entrenched, and inflation expectations de-anchor. In that case, RBI will have to be more resolute and tighten monetary policy even more aggressively to manage the economy. This will impact investment and employment in the system. But restoring price stability is critically important and a precondition for sustained economic growth. A key lesson from earlier episodes of inflation was that moving too slowly to restrain it entails a much more costly subsequent tightening of monetary policy.
However, monetary policy is only part of the story. Fiscal policy will need to play a much more proactive role in managing India's economy. Taxation and government expenditure have strong political overtones, but successful macroeconomic stabilization necessitates navigating them via stakeholder consultations in emergency situations like the present one. Speeding up economic revival in the wake of the pandemic calls for fiscal policy to play a more dominant role in macroeconomic stabilization by providing industry sufficient incentives to begin its investment plans in various sectors of the economy. Fiscal policy needs to go back to fundamentals and be recalibrated. GST is a step in the right direction, but further rationalization and streamlining of this important financial tool is required.
Policies to address specific impacts on energy and food prices should focus on the most vulnerable sections of society. And as monkeypox enters the picture, vaccination rates (including those of booster shots) must rise to protect the public against future Covid variants. Finally, no long-term economic revival is possible without mitigating climate change, which calls for urgent policy action to limit emissions and raise investments to hasten the transition to green energies.
Both India and the global economy are passing through difficult times, but there is light at the end of the tunnel. The current level of inflation represents a clear risk for macroeconomic stability and bringing it back to the Central Banks' comfort zones should be the top priority for policymakers. The resulting synchronized monetary tightening across countries is historically unprecedented, and its results are expected to hurt. But delaying it will only prolong hardship. This is where targeted fiscal support can help cushion the impact on the most vulnerable. Multilateral cooperation will be key in many socioeconomic areas, from climate change and pandemic preparedness to food security and debt distress. In today's challenging environment, strengthening international cooperation remains our best bet to expedite national economic revival.
*Picture Credit:Google
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