Economics · Law · Public Policy

Combating Inflation: Need for Changes in Monetary and Fiscal Policies

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Inflation is a much debated subject in India in recent times. Inflation is the apparent cancer of Indian Economic Growth. RBI’s Monetary Policy is seen as a panacea, by the State and the laymen, for arresting this cancer’s mushrooming growth in the financial sector. But, this is a wrong approach. RBI also has its limitations. The State cannot delegate the duty of maintaining the financial health of the country in the tied-down hands of RBI. RBI has its hands tied-down because monetary policy plays a limited role. In contrast, Fiscal Policy plays a huge role in this financial equation. The absence of harmony between the objectives and aims of the monetary and financial policies also seems apparent.

We must find solutions. Solutions are required both in the laws and in the policies. The author proposes five solutions:

(1) Need for looking more into the supply-side responses. Monetary and Fiscal Policies should not only concentrate on demand push inflation, but also on cost push inflation. In Indian realm, unfortunately, Inflation is misunderstood as just as Demand push inflation only.

(2) Need for prior decision making as to broad objectives/aims of the proposed monetary policy by Government instead of the RBI Governor, as also advocated by Financial Sector Legislative Reforms Commission (2013). This solution, if adopted, will increase synchrony and harmony in the fiscal and monetary policies and ensure that the RBI and the State are on the same page on financial and monetary issues.

 (3) Need for a core inflation sector index to be adopted by the RBI, as one of the parameter, for deciding its monetary policy which excludes those sectors over which RBI’s policies don’t have much control. Eg. In USA, a core inflation index excludes food and oil from the basket because prices of these commodities do not respond to Federal Reserve policy. The excluded items differ from country to country depending on their volatility. This will make RBI’s aims more realistic.

(4) There is need for structural reforms take place on the fiscal front. The food inflation occurs especially due the systemic flaws. There is need for work at this end.

(5) Need for dealing with the issues of Import Inflation. The dependence on imported goods for which highly valued foreign currency has to be paid also has been underplayed.

(6) Need for shifting the focus from the issue of inflation to the issue of economic growth. Overemphasis on combating inflation sometimes comes at the cost of economic growth. This aspect needs to be emphasized. Increasing interest rates blindly in the monetary policy does not help. High interest rate has been identified, by many, as a major barrier to boosting growth. Entrepreneurs many a times hold on to their investment plans pending any relaxation in monetary policy by the RBI.

There is need for bringing the necessary changes. Otherwise, the common man will keep on suffering.

About the Author

photo1Bhavya Nain

Bhavya is a practising lawyer, based in Delhi. He has always been passionate about legal research and legal writing. In this direction, he has worked as a Law Researcher with three Hon’ble Judges of the Supreme Court of India. He also has a liking for public speaking and, indeed does speak at various conferences on various social issues like Gender Justice, Corruption Laws, Corporate Governance, etc.  He likes advanced social and management science studies and currently pursuing courses from University of Virginia, USA; University of Maryland, USA; IE Business School, Madrid and Duke University, USA. His ambition is to use his knowledge and efforts for the larger public and social good.  Currently, he is working as the Senior Research Associate for Alexis Centre for Public Policy and International Relations.

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