Inflation figures relating to the consumer price index and wholesale price index for March have been released. The downward trend shown in inflation previously has been reversed. Wholesale inflation increased from 4.68% in February to 5.7% in March. Retail inflation increased from 8.03% to 8.31% in the same period. Vegetables and fruit experienced an inflationary surge. Wholesale inflation in manufactured goods has also gone up. It looks as if the economy is heading for a stagflationary crisis. It s argued that monetary policy is not effective in controlling food prices and so the RBI can do nothing about it. But, in fact, the Bank can curb price rise in the sector by stifling inflationary expectations.
The manufacturing sector is contracting. There are complaints about unused capacity leading to manufacturing inflation. In India, the indications are that inflation expectations are high and rising. These expectations can be moderated only if they are low and stable for a long period of time. That is where the RBI can move in to target inflation. The experience of the US in the 1970s can offer a lesson to the RBI. How to deal with stagflation in the circumstances and to put the economy on a high growth trajectory? First, inflation can be contained and along with it high inflation expectations. To retain its credibility, the RBI has to keep inflation low and stable. It must be borne in mind that high inflation also stifles growth as it creates an atmosphere of continued uncertainty.
