Considering the current situation of the Indian economy, the inflation-targeting framework needs a relook. Analyse (200 Words)
Refer - Business Line
Enrich the answer from other sources, if the question demands.
IAS Parliament 4 years
KEY POINTS
Given India’s current conditions and stage of development, the implicit and explicit assumptions underlying Chapter III-F of the RBI Act are not valid and have become a hindrance to the achievement of India’s development goals, and this Chapter should be scrapped through an ordinance.
Inflation control provisions
· This provision also does not take into account the fact that for all objectives, including inflation control, the RBI is not the sole or even the principal actor and has to work as a member of the team of institutions managing the macro-economic policy of India.
· This gives predominance to the CPI in defining inflation. In India, other indicators of inflation such as the Wholesale Price Index are important for export performance. The Act goes on to say: “The Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target. The decision of the Monetary Policy Committee shall be binding on the Bank.”
· This implicitly assumes that the policy rate can determine the inflation rate. But in India, experience shows a weak link between the repo rate and the CPI. This is due to numerous factors: inadequate transmission of the repo rate, importance of externally determined prices such as food prices and fuel prices, and the role of administered prices such as wages and salaries as per the Pay Commission.
Investment rate
· Since March 2010, the RBI has been pursuing a policy of high repo rate with occasional minor cuts.
· During this period, the investment rate in India has been poor. One important indicator is funds raised for investment by the private corporate sector during 2011-2018. Soon after the massive increase in the repo rate in 2010-11, there was a massive decline in projects financed by various institutions; and during the period since 2011, the investment financed by these institutions has been at a low level with a small upturn in recent years. In Indian conditions, the repo rate is more powerful to depress private investment than to reduce the CPI.
· Thus under present conditions, the RBI may constrain achievement of the goals of increased GDP and employment via higher investment and exports.
· For re-tuning India’s monetary policy framework, India may learn from the practices of Asian countries, such as China, Japan and Singapore in the early phases of their development, when they achieved rapid growth with stability without following any rigid mechanical rules about inflation targeting and by integrating monetary policy in an overall framework for macro-economic management.
Madhu 4 years
Review answer sir
Venkateshwaran R 4 years
Kindly provide feedback thankyou
