The latest GDP figures show that the Indian economy is slowing down. The last quarterly figures indicated national income grew by 4.4%, which was lower than in the preceding two quarters. This was immediately ascribed to the hikes in interest rates by the Reserve Bank for almost a year now by as much as 2.50%. Some have even argued that the central bank should now evaluate the impact of its stance on stricter monetary policy regimes to control the runaway prices. Indeed, the prices have been rising, no doubt. The principal responsibility of any central bank is to ensure a smooth price situation. Inflation control is a primary objective of the central bank and whatever it takes to achieve that aim, it should not dither from it. But the argument runs that the RBI should weigh the costs of its inflation control stance. A harsh monetary policy resulting in the secular slowdown of the economy could create more hardship for the people and damage the economic prospects. So why not tolerate a little more inflation than introducing a lower growth trajectory?
Needless to say, RBI governor, Shaktikanta Das, is well aware of this dilemma and he has referred to it time and again in the course of his many monetary policy statements. The choice for the central bankers is nothing new and it is raised every time the prices are elevated and the economy is none too strong. For the Indian economy, consumer price inflation is rising fast and already a tad higher than its tolerance band of 4% plus minus 2%. This calls for action, particularly when the inflation levels are very much elevated for much of the world. The continuing Russian war in Ukraine has been held to have directly pushed up prices all over the world. The Ukraine war has particularly hurt the balance in the global energy markets and the trends and instability in energy prices are fuelling prices all around. While the world had gotten used to a low inflation regime for over a decade, now it is facing stiffening prices. The fuel price hikes, along with the real scarcity and rising prices of food, are proving to be lethal combinations for ushering in an era of miserable existence for millions across the world.
The present domestic fuel price regime is linked to global market prices and hence the domestic costs of fuel are dancing in tune with the global ones. But these are fast approaching intolerable limits. The global oil market specialists are predicting a price level of USD 100 per barrel shortly. Hence, imported fuel-driven inflation is impossible to avoid in times like these and we must prepare for it. Any inflation is bad, whether driven by domestic factors or imported ones. So, fuel inflation could be as damaging as the rise in vegetable prices in the country. These determine the hardships that people face in their daily living conditions. Apart from looking into various data on financial markets, economic variables, fiscal trends, and global developments, the bank makes conscious efforts to meet people’s groups to ascertain what problems they are facing. Maybe, there could be some justification for making economic policy formulations more grounded in social feedback from people than merely mere number crunching and abstract formulations. After all, economics is common sense, and judgment calls rather than trying to frame it like an exact science.