3 Will inflation put a squeeze on future growth?

Since December 2019 the Consumer Price Index has grown above RBI’S target of 4% every quarter. In the minutes of the latest MPC meeting, members warned against the practice of treating the upper band of 6% as the inflation target instead of the actual monetary target. RBI continues to maintain that the current phase of high inflation should be seen as transient and supply-side driven and monetary policy should do all it can do boost aggregate demand. Such an approach amounts to kicking the proverbial can of ”what will happen to already high inflation when aggregate demand picks up” down the road. The government has ruled out the possibility of providing any significant relief in petroleum prices. This is a direct fallout of the precarious fiscal situation. This will create a cascading effect on inflation. As the 2024 elections near, the government will have to consider bigger hikes in Minimum Support Prices, which have grown at a lower rate than retail inflation. Many experts expect a spike in services inflation, once vaccinations cross a critical threshold and demand picks up. Persisting high inflation can adversely affect growth via two routes. It can spook foreign capital , leading to exchange rate depreciation, adversely affecting India’s trade balance in energy (every barrel of oil will cost more in rupee terms). There is also the danger of high prices putting a squeeze on un-indexed earnings of informal sector workers, which will weaken aggregate demand.