Recovery vs inflation

Even though the year 2020 was lost because of the once-in-hundred years pandemic, people had harboured a glimmer of hope that 2021 would be better. While January and February did seem so, people’s complacency brought back the coronavirus in full strength. As if the

Covid-19 pandemic were not enough, economic data suggests a difficult time ahead. Wholesale Price Index (WPI) numbers that were released on Thursday showed that the rise in wholesale prices has touched an eightyear high at 7.39 per cent in March.

While it is true that WPI or wholesale inflation numbers are no longer used by the Reserve Bank of India (RBI) to determine lending rates, the retail inflation is better at 5.52 per cent. Though it is still within the inflation mandate of four per cent (plus or minus two per cent) given to the RBI, it could shoot up if supply constraints emerge because of local lockdowns.

The rising inflation and contracting industrial production present the most difficult conundrum for the Narendra Modi government. Since May

2014, the government has been careful not to stoke inflationary pressures in any manner, even if it meant sacrificing economic growth for some time. In its first term, it stopped raising the minimum support price for farmers, which was one of the key reasons for higher inflation during the

UPA-2 government. Even during the lockdown, the government let most people fend for themselves without opting for unorthodox policies.

One of the tools that RBI employs to tame inflation is the higher interest rate. However, it cannot drop its accommodative monetary policy, if it has to spur economic growth at least back to the pre-Covid levels. The government and RBI have a difficult choice to make between taming inflation and boosting economic growth. Good luck, finance minister and RBI governor!