Date: 10/04/2022

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment

Key Phrases: Monetary Policy Committee, consumer price index, imported inflation, current account deficit, foreign direct investment,

Context:

• The Monetary Policy Committee (MPC) announced that the repo rate has been increased by 50 basis points and the rate is now 5.90%. During its meeting MPC has decided to keep the reverse repo rate unchanged at 3.35%.

Background

• Even though the RBI has raised the repo rate, the probability of inflation, as measured by the consumer price index (CPI), remaining higher than the central bank’s tolerance band is increasing by the day.
• The risks are primarily from three sides:
  • The depreciating rupee,
  • Fast-depleting grain stocks, especially of wheat, and
  • Vagaries of weather as a result of climate change.
• Let us look into detail the policy options before the government.

On the fast depreciating rupee

• As the US Federal Reserve raises its interest rates, there is going to be pressure on the Indian rupee and many other currencies around the world.
• We may draw some consolation from the rupee holding out relatively better than many other major currencies, such as the yen or the pound.
• But even a 10 percent depreciation in the rupee since January 2022 poses a risk of imported inflation, especially through crude oil and gas and fertilizers and edible oils.
• The RBI has already spent more than $80 billion to support the rupee, and there are limits to which it can go.
• And, if RBI tries to hold the rupee artificially high, it will adversely hit Indian exports, widening the current account deficit and putting further pressure on the rupee.
• The best that RBI can and should do is to avoid a sudden and abrupt fall in the rupee, but also let it find its natural level given what is happening globally, especially in the currency markets

Risk of Higher Inflation

• The bottom line is that the risks of higher inflation from the falling rupee remain and are likely to continue for at least one year, if not more.
• On this, one should read not as much from what the RBI or Ministry of Finance says, but more importantly what Jerome Powell, the Chair of Federal Reserve of the US is saying.
• He is committed to bringing down inflation in the US to 2 per cent from the current levels of more than 8 per cent.
• Although the time frame he has in mind is two to three years, indicating it will not be a hard landing, yet he is increasing interest rates by 75 basis points each time.
• The writing is on the wall for Indian policymakers. If they have to circumvent this, they have to have innovative policies to promote exports and attract more foreign direct investment (FDI)

Depleting Grain Stocks

• On depleting grain stocks, as of now, there is no immediate alarm, especially for rice.
• But the Cabinet’s decision to extend the PM Garib Kalyan Ann Yojana (PMGKY) by another three months will put pressure not only on stocks but also on the fisc.
• The fiscal deficit of the Centre may go higher than provisioned in the Budget for FY23.
• The finance ministry not supporting the extension of this free food beyond September was, economically, a rational recommendation.
• More so as Covid-19 is behind us and the economy is back to its normal level of activity.
• The dilemma for the government is how to keep it within the limits of fiscal prudence.
• The NFSA does have the provision that after three years, the issue prices for PDS supplies can be revised. However, the Government did not do so and the burden of food subsidies has piled up.
• It spiked when the PMGKY was announced in April 2020 in the wake of the pandemic’s first wave.
• At that time, it was perhaps necessary to support all those who lost their jobs. But doubling free rations depleted the bulging stocks of grains.
• Now with wheat procurement having plummeted, there is a concern about whether stocks are enough to curb inflationary expectations in the country.
• To replenish wheat stocks in FCI godowns, the government will have to raise the minimum support price (MSP) of wheat quite substantially.
• For rice, the current stocks are ample, but given the monsoon vagaries, the forthcoming rice harvest is estimated to be about 7 million tonnes less.
• It is time to realize that the PMGKY will be difficult to extend beyond December without putting an undue burden on MSPs and the fiscal deficit.
• The best policy option will be to fix the issue prices of PDS supplies at half the MSP and limit the PDS coverage to 30 percent of the bottom population.

Climate Change

• Climate change is an increasing concern. It will haunt our policymakers in the months and years to come.
• India is going to have extreme events - heatwaves, droughts, floods, etc. - of increasing intensity and frequency.
• We may keep blaming developed economies and ask for climate justice, yet we will have to act fast and boldly to correct our own policies that increase GHG emissions and aggravate the situation.
• Power provided at next-to-nothing prices, free water and highly subsidized fertilizers - especially urea - are some of the policies that are damaging the natural environment.

Taming Food Inflation / Way Forward

• If we have to tame food inflation, we will have to invest more in climate-smart agriculture, in precision farming, with high productivity and less damage to natural resources.
• Science and technologies can help us, but they cannot be scaled in a perverse policy ecosystem.
• The call to set the situation right rests with the Cabinet. So far one sees only baby steps in this direction. India has a long way to tame inflation.

Source: Indian Express

Mains Question;

Q. Checking rising food costs will require investing in sustainable agriculture, which in turn requires doing away with perverse subsidies. Discuss. [150 Words].