By B Yerram Raju The lockdown in China, and the fresh virus outbreak in Hong Kong, Australia, the UK, Germany etc, pose a severe threat and demand extreme caution. Ukraine war remains a global concern. The ripple effects of the war are seen in the central banks raising their policy rates in the US, UK […]
By B Yerram Raju
The lockdown in China, and the fresh virus outbreak in Hong Kong, Australia, the UK, Germany etc, pose a severe threat and demand extreme caution. Ukraine war remains a global concern. The ripple effects of the war are seen in the central banks raising their policy rates in the US, UK and Germany. In India, headline inflation crossed the RBI expectation of 6%.
The EPW statistics at the end of January 2022 show that the Consumer Price Index (CPI) averaged 6.2% in FY21 with consumer food component at 7.7%, while that of miscellaneous at 6.6%. Occupation wise, CPI for agricultural labourers measured by 1986-87 is lower than that of the industrial workers by eight decibels.
The RBI in its April 2022 policy seems to focus more on growth than on inflation, and it has been consistently holding on to its position on the subject.
During the last two years of the pandemic, the economy moved in the urban areas to e-markets and food retail suppliers like Zomato and Swiggy. There is considerable influence of ready-to-eat foods in the rural areas as well. Retail brands are moving fast into these areas. Housing, amusement/recreational expenses, consumer durables, FMCG and transportation have gained in prominence over time but continue to represent a lower weightage in the overall price index. Retail business in February 2022 grew 6% compared with the pre-pandemic levels (OECD).
Food and Energy
Recent inflation has been concentrated on food and energy, two items which absorb a higher proportion of the spending baskets of the poor than of the rich. Resultantly, lower income households tended to experience higher inflation rates than higher income groups over the last decade.
Currently, India is riding on large food stocks – wheat with the Food Corporation of India, at 23.4 million tonnes (mt) as against a buffer stock limit of 7.46 mt. FCI stocks of rice and other cereals have already reached their peak with no space even in its tarpaulin storage. Ashok Gulati in a recent article suggested export of 15 mt of wheat to the needy in the world. He also suggested a ceiling on procurement prices at no more than 3% of the MSP in all States.
Back to the Basics
Keynesian policies triggered certain economic changes (with some overlapping categories):
• Dramatic increase in government expenditures especially on social welfare and economic and social infrastructure.
• Wide-ranging panoply of social welfare arrangements that sustained the living standards and spending capacity not only of the poor but of all sections of society — the growth in mobile phones and expenditures on entertainment, tourism, social extravaganza, unmindful of the belly hunger, hold enough evidence.
• Formidable array of tax and other revenue-raising arrangements to finance the exploding government expenditures; and
• Rigid floor and upward-pushing ceiling of public expenditures tending constantly and often dramatically to outrun revenues and cause chronic inflation.
The journey of price is intriguing. It travels faster than the stocks. The speed with which it travels is at the same pace or faster than the budgetary announcements. It does not wait for government’s action.
Responsive Credit Supply
The year-on-year growth rate of the index of industrial production (IIP) decreased to 0.4% in December 2021 from 2.2% a year ago (EPW). Industrial growth in manufacturing is minus one per cent over the year. Capital goods and consumer durables are in the negative zone of 4.6% and 2.7% respectively. However, we see a real estate boom in all major cities. When we look at the shorter term of a month, use-based industrial growth gives a lot of comfort. Primary goods, capital goods, consumer durables, and consumer non-durables rose 5.7%, 10.7%, 13.7% and 6.7% respectively. (EPW March 5)
With their NPAs declining thanks to the Bad Bank and the setting up of the National Infrastructure Investment Bank, public sector banks should be moving to responsible and responsive credit supply.
The RBI did a commendable job in ensuring that liquidity of banks did not suffer during the pandemic. Yet, banks continue to be shy on the revival of manufacturing micro, small, and medium enterprises with subordinated debt under Atmanirbhar Bharat Abhiyan disbursal at just around Rs 84 crore out of the Rs 20,000 crore of guarantee assured by the government. Credit appetite continues to be low at 7.9% over the previous year. They seem to be comforting in keeping their balances with the RBI that stood at 39% over the previous year as at the end of January 2022. It looks presumptuous to expect risk appetite among banks moving higher in the short term.
The RBI by keeping policy rates steady ensured that credit does not become costlier than the pre-pandemic level, else stocks may find their way out. This is no insurance, however, for the price stability as the trader would walk away with the consumer surplus. Therefore, in the medium term, it is a clear case of too much money chasing too few goods. Normal measures of dabbling with money and credit would not yield significant results.
Macro Prudential Policy
Macro prudential policy of the RBI is under test at the moment equal to that in the post-2008 crisis. In a paper presented at the University of Manchester in 2011, Paul Fisher – Executive Director, Markets and member of the Monetary Policy Committee of the Bank of England – explains how the Bank uses its sterling monetary operations to help meet its two core purposes: maintaining monetary stability and contributing to the stability of the financial system. He notes that this insurance can come in several forms via the Sterling Monetary Framework, including reserves averaging, which permits day-to-day fluctuations in reserves; operational standing facilities that allow counterparties to cope with operational disruptions or volatile markets; and longer-term Open Market Operations. The RBI in the recent past went by such an experience to ensure that banks do not have to ever worry about liquidity stress.
A prophetic statement by former RBI governor D Subbarao appears to suggest that the complexities of the Indian situation make it difficult if not almost impossible for the RBI to single-mindedly pursue a CPI inflation target. His immediate successor preferred the real interest rate to be in the range of 1.5-2% (nominal rate minus inflation) to keep enough interest in the savers of the Indian economy, the households. However, during the last one year, savers are the worst-hit with negative yields on the savings of the households. Will this find a solution in the emerging policy?
If the problem were not to escalate, we need to drive our attention aggressively on strategies to increase farm production and engineering goods. It is production and not prices that will drive growth. In that scenario, the consumer would be able to empty their valet triggering high growth on a sustainable basis.
A durable turnaround is waiting round the corner amidst threatening uncertainties. Growth is important but inflation puts the cost on the poor and avoiding the latter is the task awaiting the Monetary Policy of the RBI.
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