In India's 6-decade economic history, the list of policy successes is short. Take out the successes induced by crises and those stemming from inadvertent inattention (for example, the "failure" to regulate the information technology sector), and the list of success-by-design shrinks even further. But the one prominent item on this list must be India's management of inflation and the exchange rate, a considerable achievement given that moderate inflation was achieved in the face of three decades of fiscal laxity. And yet, today, there is a growing clamour to fix this system. It ain't broke but we still want to fix this rare success.
The fix is inflation targeting (IT), but it is both unnecessary and inappropriate for India in the foreseeable future.
Start first with the unnecessary. Milton Friedman, who famously described inflation as always and everywhere a monetary phenomenon, distinguished the proximate cause of inflation (excessive increase in money supply) from the deeper social causes. Inflation has efficiency consequences but it arguably has greater distributional ones. It transfers income to the rich and those with financial assets and away from fixed-income earners and the poor, who are less able to protect themselves against inflation. Hence the characterisation of inflation as a tax on the poor.
But the remarkable and puzzling contrast is this: India has had a pretty undistinguished record on providing essential public goods and services (health, education, water, and power) for the poor, but its record on delivering low inflation