Keep the policy momentum going

The assessment by RBI that the persistence of inflation is being driven by episodic surges in food prices may, while being correct, come into question in the run-up to next year’s general elections. Food prices have an inordinate effect on political outcomes in the country, and an expanded and improved welfare delivery mechanism may not be an adequate defence against the mehengai argument. This could influence the policy establishment that has prioritised growth over price control as the post-pandemic course for economic recovery. This is a course that allows the government and the central bank to wind down previous policy accommodations and restore the fiscal balance within an acceptable time frame. In that scheme of things, inflation has a trajectory to arrive at the policy target after the election.

India has come in for international appreciation of its economic management during and in the aftermath of the Covid-19 outbreak. It had a remarkable recovery that is holding up well against the argument of an eventual slowdown as the consumption surge subsides. The policy framework has anticipated this with a government-led capex push that is crowding in private investment. Separately, India is positioning itself through investment incentives to push manufacturing exports as the world seeks supply-chain resilience. These efforts could counteract the effects of a gradual monetary tightening designed for a soft landing. The government has been ready with backstops against supply-side inflation as the situation warrants. On its part, RBI has delivered on the required demand compression, and it is showing up in core inflation that filters out volatile food and fuel prices.

Politics, however, could cloud the policy certainty with unfortunate consequences. It would be a costly mistake if India were to be jolted out of its steady state of growth.