The Good Side Of Inflation

Accelerating prices make govt debt management easier. Higher food prices mean bigger farmer income

- Somnath Mukherjee

Inflation’s reared its head as the devil of our times, globally. A bit of a nasty devil too, given just how long it has been sleeping.

India has a politically fraught relationship with inflation. Even when headline inflation numbers are benign, charges of “price rise” fly thick and fast. When the numbers are elevated, as they are today, they obviously acquire a sharper edge. Paradoxically, inflation isn’t a monochromatic evil.

For starters, inflation, in moderate doses, is a great aid to the government expanding fiscal intervention amid economic sluggishness. After many years in the 70-75% (of GDP) range, India’s public debt-to-GDP ratio has shot up in the last two years.

Partly on account of the sharp slowdown in growth and partly on account of higher government borrowing to support the Covid-impacted economy, India’s debt-to-GDP touched 87% in the fiscal year ending March 2022. It is expected to settle in the 85-90% range in the foreseeable future.

That is likely the peak range for comfort – both for a government that has made fiscal cautiousness its calling card as well as for international ratings agencies. In other words, even as India struggles with a K-shaped recovery and myriad imported challenges, the government has limited headroom to expand fiscal intervention.

Unless, a high-ish inflation, trending at a rate higher than the yields on government bonds, inflates the debt away faster, creating the headroom for the government to expand the fisc.