RBI goes for the jugular as last eight rate increases and a bumper crop fail.
RBI governor D Subbarao’s 50-bps bang may yield little results, say economists and industry players. Combating a problem that has its origin somewhere else requires a comprehensive plan. The government cannot be profligate if demand and prices have to be contained.
Inflation is now global. With liquidity sloshing around the rest of the world, prices of commodities are unlikely to moderate and raising policy rates will add to the problem, not solve it, say economists. Yes, inflation can be tamed by monetary policy action, if India can convince the central banks of America and China to tighten their belts, too. The time is probably ripe for central bankers to come together, like they did after the financial crisis in 2008. Unfortunately, they’re not close to any tightening, so India needs to live with high prices for more time. Since it could not pass on oil prices to consumers, the government chose the easier way out and widened the fiscal deficit, leaving RBI no other option but to increase rates.
Industry captains say it’s time the government set its house in order. RBI’s policy statement also says the fiscal situation needs to be brought under check if inflation has to be battled in the long term. With the government not increasing prices of fuel, the fiscal deficit is only widening and this will “counter the moderating trend in aggregate demand
But it’s not going to be easy for the government to reduce spending as it also faces the issue of cost overruns due to the general increase in prices. Explains Siddhartha Sanyal, chief India economist at Barclays Capital: “The more inflation rises, the more it puts pressure on government spending. A large part of the government’s spending is on wages, subsidies and interest and with price levels going up, such expenditure can also move up significantly.”
