Inflation is basically a sustained increase in prices of
goods and services over a period of time, which results in reduction of
purchasing power of money. After the 2008 great recession, which also struck
India's economy, there was a severe need to devise a policy mechanism to
control the inflation which is required to maintain the price stability. In
2016 India embarked on adopting Inflation targeting replacing multi indictor
approach (MIA) used since 1998. RBI is using consumer price index (CPI) as an
indicator of inflation with the base year 2011-12.
Government of India constituted a monetary policy committee (MPC)
having a sole mandate of maintaining inflation targets and also given the
responsibility for fixing the benchmark interest rates in India. The committee comprises six members- three
RBI officials and other three nominated by government. The committee has been
functional since then with a mandate of maintaining an inflation target of 4%
(with acceptability of 2 % above or below this target). It has been successful
to maintain the inflation within the limits but with repercussions such as for
many quarters food inflation remained high out of the desired target range.
The decision to replace MIA with inflation targeting faced
with lot of flak. It has been criticized on the ground that, India being a
country with different cultures, having extreme dependence on monsoon and wide
unirrigated regions and a huge burgeoning population in an extreme need of
employment, focusing on a single parameter and hoping all other parameters to
align is farcical approach. Also in India major part of economy is driven via
informal market where such policy measures doesn’t penetrate well and can take time
to show effect. On the employment front India has not seen a major shift, such
government policies have not shown much effect to cater the need of young
population.
With a tag of fastest growing economy, it is desirable that
we look into the fact that consumption is key driver of economic growth, while
investment lags. As investment lags behind it would be pretty difficult for the
policy makers to increase the employment opportunities, which can be seen in
the current scenario and simultaneously keeping the inflation under the desired
scale.
The need of the hour is conduct extensive behavioral study
on tolerance level of inflation, segregating the effect on food and nonfood
inflation, and tradeoff between growth and inflation. The policy makers should
also align the minimum support price with the inflation targets so that the
farmers income won’t get affected, which would help in maintaining the price
stability. Policy makers should also try to realign the inflation target so
that demographic dividend could be utilized to its full extent and major
problem of employment could be tackled.
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