The war on inflation-targeting

Ever since RBI announced the intention of installing an inflation-targeting framework, there has been a regular supply of articles criticising this move, arguing at once, that inflation targeting does not work in Indian conditions and, that it has failed in developed nations (where demand was saturated a long time ago).  That is fine; views of every hue should be welcomed.  Of late, though, the supply has positively intensified, to put it mildly, and there is a complete (and curious) lack of articles arguing for the benefits thereof to balance the equation.  I could speculate as to the reasons for this based on what I believe in private but in this defamatory age I would rather not.

Briefly, the arguments go that, as said earlier, inflation targeting has failed in countries that adopted it, that monetary and fiscal policy should go hand in hand and that growth is what India needs at the moment.   All these arguments are fine and dandy but do they not disregard the evidence of what happened in India between 2009-2013?  That is, the last time monetary and fiscal policy worked ‘in tandem’?

What is this working in tandem business such columnists refer to anyway but a euphemism for saying monetary policy should bow down on both knees to fiscal policy…and restart the printing press?  By all means, monetary and fiscal policy should go together and the RBI governor does not seem to be saying anything different.  Yes, fiscal policy should support monetary policy in the mission of bringing down inflation in a long lasting manner…by implementing necessary supply side reforms.  Asking the central bank to toe the line of government in inducing demand when inflation hasn’t yet been contained is….well, in that case, you don’t need an academic to head RBI and any meek public servant who can be threatened with suspension of his pension dues will do!

But coming back to the lessons of 2009-2013, what happened is govt decided to ignore fiscal consolidation ‘temporarily’ to revive the economy….at the behest of industry.  RBI followed suit by following an easy money policy.  Both the Finance Ministry and the RBI stayed the course way too long in this instance until inflation spun out of control.  To remind the pro-growth lobby of the facts, WPI inflation, which is today in negative territory, hovered in double digits through 2011-12!  It was in early 2011 that RBI finally seemed to ignore pressure from the growth lobby and doubled down on inflation.  But it was too late to contain the damage by then.

The other problem caused by the easy money policy was to create growth out of thin air, a govt spending induced bubble which burst the moment RBI tightened the screws (and Fin Min, with Chidambaram taking over again, too resumed consolidation).  Industry, which directly or indirectly bemoaned tight policy then and now, paid a heavy price as the capacity they installed to meet high demand during 2009-10 was laid to waste and remains unutilised or underutilised to date.  As somebody who works in the auto sector, I know this all too well and the situation is much worse in sectors like steel where there is a global glut.

There is no point in crying over spilt milk.  The mistakes of 2009-2012 are in the past and India will have to live with their consequences.  But the least we can do is learn from them and not repeat them.  It is way too soon to be clamouring for a demand injection to spur growth.  Households are just about beginning to recover from the battering they faced in the high inflation years, particularly post 2012 when inflation remained high but growth, and hand in hand salary raises, slowed down.  The repairing of the economy is not over.

If at all you should clamour over something, it is the pace of the repair job being undertaken by the govt (as distinguished from the narrow monetary policy remit of the RBI).  Urge govt to hurry up and get done with the plumbing.  But urging RBI to repeat the mistakes of 2009-12 is intellectual dishonesty of blatant levels.  You could cite any number of studies or theories to serve your anti-RBI conclusions.

Or you could just step out and check the prices of everyday essentials.  Yeah…you know where the truth lies.  Inflation targeting may not be the panacea it is seen as by some folks, but it happens to be the need of the hour in a country that has suffered high inflation for the last few years, a country where govts are given to fiscal profligacy, a country where revenue generation is just not enough to finance govt expenditure and finally a country where wasteful govt spend is justified under populist pretexts.  To quote Barry Goldwater, “In your heart, you know he’s right.”

 

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One Response to “The war on inflation-targeting”

  1. lavernefletcher942 Says:

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