Which complicates economic policy challenge

One of the biggest arguments in favour of India not giving a large fiscal package to cushion the pandemic’s impact was that it could pose risks to macroeconomic stability. Government officials have often cited runaway inflation in advanced countries, which gave large fiscal stimuli, as a vindication of India’s official policy response. Had international commodity prices not seen a spike, the strategy could have paid off to some extent. However, the price disruption after the Russia-ukraine war has left the Indian economy vulnerable to high rates of inflation without having indulged in so-called fiscal profligacy. While monetary policy will face little pressure against unleashing interest rate hikes and sucking back liquidity, it is the fiscal arm which will face the bigger dilemma, especially on the question of sharing the burden of higher petroleum prices between consumers and the government; and taking pre-emptive strikes against food price inflation, which could hurt farmers’ incomes. The first such pre-emptive strike, the ban on wheat exports, has already taken place.