By Phrangsngi Pyrtuh
Headline inflation which has been high in India was attributed to the downfall of the UPA government besides corruption and scams. Concerted efforts and protests against high inflation by civil society and organizations do not fall on deaf ears. And public opposition to rising prices are common in most parts of the county. It is both a social and political issue. The question on regulating inflation is how much of it is within the domain of public institutions?
Headline inflation is not as low as it used to be but there is an impression that either the NDA government or the RBI or both have somehow reined in inflation. Yet no one is happy. The corporates and bankers are running out of patience while the prices of essential goods are moderated only when monsoon plays supportive role. The RBI Governor Raghuram Rajan in a recent event in Mumbai attended by bankers and executives explained his new found theory of inflation from the perspective of the common man. He made an important revelation on why the RBI refuses to lower interest rates even though the inflation index showed otherwise in recent times. This was a reconciliatory move by the RBI Governor who has been facing flak from the corporate world and from bankers and even from the Government. The interest rate is never seen to have any impact on the common man but the RBI governor has tweaked it to give it an impeccable theory which is difficult to ignore.
According to the Rajan average inflation from 2006-2013 was as high as 9% which has subsided to as low as 3.78 % for July 2015. Normally such low figures are positive signs for economic actors to act, prop and wheel the economy along a certain direction. The monetary policy for instance would consider such a situation a fertile ground for easing interest rates allowing banks to cut interest rates and thus increasing borrowing.
The banks and corporates have been lobbying for lower interest rates ever headline inflation falls. They have been left utterly disappointed as the RBI Governor refuses to budge and maintains a stoic stance via-a-vis interest rates. The Governor attributed inaction from the apex bank to a perception of the common man that inflation is still high or is bound to resurface sooner. This the Governor attributed to the long period of high inflationary pressure which has made a false but serious impression on the common man that inflation is still high despite the stats mentioning otherwise. And if the consumers continue to subscribe to this view it will ultimately affect their demand for goods and services by saving more. So there is no sense in lowering interest rates.
In the past the media has made news of supposed skirmishes and differences on key issues between the Finance ministry Arun Jaitley and the RBI with the latter’s contention that interest should go down, going by data on inflationary figures. The Finance Minister has repeatedly asked for interest rate cuts citing falling demand and weak growth. Each time the RBI refuses to cut rates the media highlights the differences between the two policy makers. This was all put to rest at the Mumbai gathering. The Governor made it very clear that for inflation to come down India needs a long period of low inflation which should change the perception of the common man.
Previously the Governor proposed that the Indian Parliament could set inflation targets for the RBI to follow. The apex bank wishes to hold itself accountable to the elected representatives of the people. The Indian Parliament is already responsible for fiscal management where targets are set according to the Fiscal Responsibility Budgetary Management (FRBM) with marginal success and in all likelihood may do the same on the monetary front for Inflation Targeting. There is much debate on whether this is feasible or if such a move is counterproductive. Any false move to target and control inflation may increase unemployment according to one theory spurring recessionary fears and exacerbate pessimistic expectations. Ironically the Governor at the Mumbai meet was referring to the very same pessimism but justifies the apex bank’s reluctance of lowering interest rates on behalf of the common man.
While the Governor may have his own theory there is no denial that the RBI and the Government tend to look at inflation figures differently. The RBI has for so long regarded the Consumer Price Index (CPI) as the benchmark for any decision making. The government has been highlighting inflation as measured by the Wholesale Price Index (WPI). The WPI has for a long time been considered as headline inflation rate which generally shows a lower inflation rate as it is closer to the producer price index. While internationally consumer price index is the standard measurement of Inflation, India despite having multiple consumer price indices chose WPI as the standard headline inflation. This is also necessary to build its case against the insistence of the RBI to maintain status quo over interest rates.
If the Indian Parliament set inflation targets for the RBI to follow there may be no way out for the latter to offer resistance which it has been doing till date. The RBI is an institution which is neither prone to pressure or appeasement. It is well aware of the dangers that runaway inflation can cause on the economy and society. A coordinated effort between the Government and the RBI is the need of the hour. One is an expert on monetary policy whose expertise is invaluable, the other is the policy formulating authority whose policies have far reaching consequences. By offering fig leaf to the Indian Parliament the RBI would have to bow down to its dictates. If it leads to a peaceful coexistence and collaboration between the RBI and the Indian Parliament then such submission is applauded but if it leads to the subjugation of the RBI as the monetary authority it may not augur well for the country’s monetary policies.