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New Delhi must now focus on restoring growth

In its half-yearly review of monetary policy on Tuesday, the Reserve Bank of India (RBI) raised the repo rate by 25 basis points. Clearly, the era of loose, growth-supporting monetary policy is over. If so, there are several points that emerge. For one thing, it is clear that the RBI has now shifted to caring more about consumer price inflation, as opposed to wholesale price inflation, which was its only target earlier. The consumer price index (CPI) has been in double digits for much of the past year, and was 9.8 per cent in September. However, the wholesale price index (WPI) has generally been several percentage points lower. If the RBI is now targeting the CPI and not the WPI, this shift should have been made explicit - and an explanation should have been provided as to why the shift does not imply an implicit tightening of money, given the differential trends for the WPI and the CPI historically.

The RBI has chosen to focus on consumer price inflation although it could be argued that tight monetary policy will affect it little, given that it is driven by high food inflation. The RBI knows that monetary policy cannot affect food inflation directly, but argues it can influence the consequent build-up of inflationary expectations. This mechanism is much debated among economists, but given the fact that the RBI has now come down clearly on one side of the argument, the government must accept that the ball is in its court; everything depends on its ability to control food inflation. That the rise in wholesale prices for many food articles is less than that in their consumer-facing prices has long indicated that this is an intermediation problem - one to do with supply chains and last-mile delivery.

The current crisis over the price of onions in Delhi makes this even more clear. That a chief minister has to travel personally to negotiate with wholesale traders in another state and that a state government has to run mobile vans on an emergency basis reveal how poor the supporting infrastructure for produce retail is. Vegetables need an equivalent of Amul's Verghese Kurien, who figured out how to get milk from the dairy to the customer - through powdering it in the interim. Onions could be transported dehydrated across India to preserve them, the way they are when they are exported, had enough dehydration plants been built. Until the government addresses this intermediation and delivery problem faced in respect of a large number of agricultural items, food inflation - and rates - will keep rising.

The other relevant point is that, while a semblance of normality has returned to the broad outlook with the rupee no longer in immediate trouble and the RBI back to focusing on a single monetary instrument, any complacency is dangerous. The fact is that the RBI's calculations that led to it raising rates suggest that the central bank thinks India's potential growth rate is much lower than it was earlier. It is difficult to find anyone today who thinks India will or can grow much faster than five per cent. This is in spite of a very high savings and investment rate - which implies that capital is being misallocated or tied up. Ending that logjam - clearing the use of capital in stalled projects, or else freeing it to go elsewhere - is the government's job. It should get back to doing that.