A Few Short-Term Options To Crank Up Growth

With inflation rising, scope for a rate cut is limited. But eliminating revenue deficit will create some investment headroom

- RK Pattnaik

The Indian economy is at the crossroads, grappling as it is now with a massive slowdown and escalating inflation. The endeavor of the authorities to counter this challenge has fallen short. It appears that a situation of policy helplessness has emerged. The current slippage is nothing short of shocking and the zeal with which quick fixes are being discussed might suggest that the game is already lost. That cannot be a place to have conversations on the policy.

The headline inflation rate (measured in terms of Consumer Price Index Combined, (CPI-C), which is the official measure of the inflation target, was placed at 7.35 percent in December 2019.

At this level, the inflation rate has been much above the ceiling of the targeted 6 percent. It may be noted that the inflation rate at 5.54 percent in November 2019 was higher than the target average rate of 4 percent and very close to the ceiling rate.

The composition of the retail inflation rate reveals that the high rate has been contributed to by food inflation, which was as high as 12.16 percent due to higher vegetable inflation (60.50 percent) and pulses inflation (15 44 percent). Fuel inflation, comprising fuel and light and transport and communication, has been lower at 0.70 percent and 4.77 percent.

In the above context, two observations are important. First, even though the headline inflation is higher, the core inflation (defined as headline inflation minus food and fuel inflation), which measures the persistence of inflation, is lower at 3.75 percent. But it may be noted that the mandate of inflation management rests on the headline and not core inflation. Therefore, the onus of monetary policy is to reduce the headline inflation rate to an average of 4 percent.