Editorial: War on inflation continues

Focus must be on public infrastructure, health and social protection, which can create jobs and improve productivity

The battle against inflation is far from over. Spiralling retail inflation — surging to a 15-month high of 7.44% in July — must ring alarm bells in government circles. Primarily driven by a rise in prices of vegetables, cereals, pulses, spices, and milk and products, the impact of the runaway inflation is being felt nationwide. Adding to the woes of the country’s economy has been the growing unemployment both in rural and urban areas. The pandemic has worsened the situation as many businesses have shut down or reduced their operations, leading to job losses. As geopolitical tensions intensify, prices of agricultural commodities, metals and energy have picked up steam, bringing back the spectre of food and energy insecurity and potential spillovers to core inflation. The RBI mainly factors in retail inflation while deciding the benchmark interest rate. In its monetary policy review last week, it kept the key repo rate unchanged at 6.5%, while raising the inflation projection from 5.1% to 5.4% for the financial year 2023-24. It is clear by now that a rate cut is unlikely in the near future. The central bank’s primary goal is to maintain stable inflation which is critical for sustainable growth. Any easing of monetary policy would occur only when average retail price inflation approaches the RBI’s target of 4%. Though the fundamentals of the Indian economy are resilient and strong, the rising inflation is a major cause for concern and is expected to strain household budgets further.

Though core inflation —non-food, non-energy component — witnessed a moderation, headline inflation is still expected to average well above 6% in the second quarter. The demand for goods and services in India has been stagnant or declining due to multiple factors like low-income growth, high inflation, unemployment and the impact of the pandemic. This has, in turn, affected the consumption and investment levels in the economy and reduced the tax revenue for the government. According to the National Statistical Office (NSO)’s Periodic Labour Force Survey (PLFS) report for 2021-22, the unemployment rate during the year was 4.1%. Moreover, India lacks adequate infrastructure such as roads, railways, ports, power, water and sanitation, which hampers its economic development and competitiveness. Poor infrastructure also affects the quality of life and health of the people, especially in rural areas. The onus is on the central government to revive the economy. Boosting consumption and investment demand, enhancing export competitiveness, reforming the financial sector and improving the business environment are some of the measures that need immediate attention. Direct fiscal stimulus must be given to those sectors of the economy that have been hit hard by the pandemic, such as MSMEs, informal workers, rural households and low-income groups. The government should also invest in public infrastructure, health, education and social protection, which can create jobs, and improve productivity.

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