Given the prevailing unholy mix of growth and inflation, it is tempting to categorize India’s economic situation as one of stagflation. Comment (200 Words)
Refer - The Indian Express
Enrich the answer from other sources, if the question demands.
IAS Parliament 3 years
KEY POINTS
· After the Reserve Bank of India’s (RBI’s) adoption of a flexible inflation targeting framework from August 2016, the rules of monetary policy have changed in India, with the central bank becoming even more focused on anchoring inflation and inflation expectations than ever before.
· The mandate for following an inflation-targeting framework based on one narrow nominal consumer price index (CPI) anchor has highlighted the challenges of conducting monetary policy in a severe growth shock scenario, particularly if it coincides with a sharp increase in headline CPI inflation as in the current period, even if this is mostly due to one-off or/and temporary factors.
· While the shift in the monetary policy focus to CPI from the wholesale price index (WPI) has been a welcome development, the current framework has led to an excessive and obsessive emphasis on point CPI estimates, at the cost of ignoring other indicators, in our view.
· The success of the inflation-targeting framework should not only be judged by the actual CPI inflation trend, but also in terms of the convergence achieved between actual CPI inflation and inflation expectations.
· In the current cycle, investment growth is likely to be impacted more severely than consumption growth, even after the recovery starts gaining traction due to risk aversion, weak profitability and a tendency to preserve cash given the uncertain outlook.
· Given the acute weakness in the demand side of the economy, persistent problems in the real estate sector, continued deleveraging of the NBFC sector and significant job losses (thereby reducing bargaining power for wage growth), we think that risk of a secular increase in inflation is limited.
· While the scope for rate cuts remains dim in the near-term, we expect the RBI to remain active with a host of unconventional measures, which will likely include more proactive bond purchases to ensure that market interest rates do not rise significantly due to fiscal and market borrowing-related concerns.
