A Cabinet Minister suggested the RBI focus on growth rather than food price inflation, citing its limited capacity to address the latter.
The comment, though clarified as personal, underscores government concerns over economic performance amidst signs of slowing consumption growth.
Growth Trends Under Scrutiny:
Declining Growth Rates: From 7.1% (2004-05 to 2015-16) to 5.2% (2016-17 to 2023-24), representing a 27% decline in average annual growth.
Manufacturing, a policy priority, slowed from 7%+ to just over 5% post-2014—the sharpest decline since Independence.
Real estate is the only sector showing faster growth since 2014.
Inflation Dynamics:
Persistent Food Price Inflation: October inflation breached the RBI’s 6% upper limit, with food inflation crossing 10%.
Contrary to assumptions, food price inflation in India has remained structurally elevated since 2019-20, unaffected by post-pandemic recovery.
Structural Issues: Agricultural production lags behind rising food demand.
Food inflation triggers a wage-price spiral, affecting broader economic stability.
Welfare and Economic Impact of Inflation:
Adverse Welfare Effects: High food inflation disproportionately affects low-income households unable to keep up with rising costs.
Growth Implications: Elevated food costs reduce discretionary spending, dampening demand for non-food goods and services.
Correlation seen between food inflation (2019-20 onwards) and negative manufacturing growth in two of the last five years.
Policy Implications:
RBI’s Role and Limitations: While the RBI’s ability to directly control food inflation is limited, removing food inflation from its mandate without alternative controls risks policy paralysis.
Broader Economic Reorientation Needed: Despite an estimated 8% GDP growth in 2023-24, inequitable growth distribution and inflation-induced imbalances call for a shift in focus.
Food price inflation not only affects welfare but also undermines sustained manufacturing and non-agricultural growth.
Recommendations:
Address Structural Food Inflation: Improve agricultural productivity and supply chains to balance demand-supply dynamics.
Refocus Policy from Growth to Inflation Control: Develop a robust anti-inflation framework to manage food price volatility.
Balanced Economic Strategy: Prioritize equitable growth to ensure benefits reach all sections of the population, mitigating inflation’s disproportionate impact.
Conclusion:
While growth remains a key metric of economic performance, India’s persistent food price inflation highlights structural challenges that demand policy attention.
Failure to address inflation risks exacerbating inequalities and hampering long-term growth sustainability.
A balanced approach integrating growth with inflation control is critical to achieving inclusive economic development.
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