The Reserve Bank of India (RBI) lullaby has ended. For the first time in many quarters, RBI Governor Shaktikanta Das, who has artfully dodged the bad news about inflation, had to get into the act abruptly, midway between the bi-monthly MPC (Monetary Policy Committee) meetings. The inflation rate was quite above the mandated six per cent in March, but during the April meeting of the MPC, no one seemed to have felt the need for alarm. There has also been a feeling that the RBI was keen to support the government's economic policies of pushing for investment and growth. On May 4, the governor and the MPC felt that there were things to be done independently of what the government may want to do. It is but a coincidence that Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman were away on the prime minister's three-country European tour.
Economic experts are not too convinced that the rate hike will solve the problem of inflation, and others feel that this hike should have come earlier. And dyed-in-the-wool experts feel that inflations and interest rates have nothing to do with each other. The inflation was attributed to the rather generous inflow of foreign funds. But that is what economists are good at. They disagree with each other. Most of them are right in partial ways. But that does not help in tackling the reality.
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The real test of the fallout of the hike should be whether the credit offtake by the private sector and personal loan-takers will decrease. If that be the case, it brings in its own consequences of lowered economic activity. But apart from personal loans, private sector credit offtake has not been too robust though the government has been doling out figures for the loans taken under various government-guaranteed schemes by the MSMEs and the employment this sector has generated. But the Index of Industrial Production (IIP) has remained below par. Covid-19 had played havoc with economic activity, and its impact was most severe in the first quarter of April-June 2020 when it fell 23 per cent. The recovery in the subsequent quarters had been bandied as a sign of resilience though the overall situation was quite grim in terms of jobs. The IIP for April-January 2020-21 was minus 12, and for April-January 2021-22, it was 13.7.
The Consumer Price Index (CPI) for March 2022 was 6.95, and the Consumer Food Price Index was 7.68. Of course, this information came in on April 12. The figures for February 2022 for CPI and CFPI were 6.07 per cent and 5.85 per cent, and in March 2021, they were 5.52 and 4.87. Those figures for February 2022 and March 2021 were not too comfortable. Things have been on edge, as it were. It is indeed the case that the RBI can do only so much, and it is the government that must manage things better. But with the rise and fall of Covid-19 waves, the second wave in April-June 2021, and the third wave in December 2021-January 2022, the supply chain interruptions these caused, the people and the economy were facing choppy conditions. The government did not want to acknowledge that the times were difficult. It tried to give a positive spin to the difficult times and say that the economy has been resilient. And there is not much to quarrel with that view. But the critical symptoms show up sooner than later.
Surprisingly, inflation figures were consistently higher in 2020 than in 2021. In August 2021, the CPI was 6.69 per cent compared to 5.30 in August 2020; it was 4.35 per cent in September 2021 and 7.27 per cent in September 2020; 4.48 per cent in October 2021 and 7.61 per cent in October 2020; 4.91 per cent in November 2021 and 6.93 in November 2020; 5.59 per cent in December 2021 and 4.59 per cent in December 2020; it was 6.01 per cent in January 2022 and 4.06 in January 2021. The inflated rate was indeed elevated throughout, higher in 2020 than in 2021. It will be argued, and rightly so, that inflation cannot be the only factor, and there are other important aspects as well. But when it comes to the issue of settling the central bank's interest rate, then inflation seems to be the clinching factor. For the advanced economies, 0 to 2 per cent is seen as the permissible inflation range, while in India, it has been 4 to 6 per cent. The inflation tolerance level is relatively higher in an emergent market economy like India. But inflation does pinch more when there are no jobs and growth levels are not too robust. The GST collections have been consistently above the Rs 1 lakh crore level, and the exports and imports have clocked well enough.
Or is it the case that the RBI was responding to the American Federal Reserve's rate hike and the fear of flight of funds that led to its precipitous action? It has been noted that India's foreign exchange levels fell by $35 billion since the beginning of the Russia-Ukraine war as of April 29. Apparently, the bank wants the foreign exchange to remain above $600 billion to be an attractive investment destination and to deal with the exigencies of the global economic situation caused by the war. The RBI's unstated anxieties are indeed well placed. What is of concern is the unrealistic optimism of the Modi government that it will remain the fastest-growing economy. There is no need to press the panic button, but we must be clear about the challenges. The prime minister's sermons about wanting to export more and buy less from outside is a simplistic mantra of sustenance and not of growth. There should be a healthy balance between what we sell to the world and what we buy from the world. India's self-reliance or Atmanirbharta is not the key to success despite Finance Minister Sitharaman's weak assurances that Atmanirbharta does not mean looking inward, which does not inspire confidence. The world economy is experiencing turbulence, and it will impact the Indian economy. So for the Modi government to pretend
that the weather is fair is dangerous.
(The writer is a New Delhi-based political commentator)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.