Why make India poorer?

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by Shaun Richards

Today brings an example which combines two of my themes and also gives us an opportunity to delve deeper into the state of play in the world’s second most populous country. The first theme is the continual establishment effort to produce a situation which avoids reality as much as possible.

India’s government is considering recommending a looser inflation target for the central bank, allowing it to focus more on economic growth despite price pressures, according to people familiar with the matter. ( Bloomberg)

Time and time again I find myself alone in pointing out that such a move will lead to claimed economic growth whilst the ordinary worker and consumer suddenly cannot afford things.Let us now move to the specifics.

A consumer-price inflation band tracked by the may be relaxed further from the current 2%-6% range, said the people, who asked not to be identified citing rules. The government still needs to hold consultations with the central bank before finalizing a new framework sometime next year. ( Bloomberg)

This tells us that India already has a very wide band for inflation control as there is a world of difference between inflation at 2% per annum and 6%. Also that the upper band at 6% if very high for these times. After all we are regularly assured that there is no inflation as many of the world’s main central banks look to drive it higher towards a 2% target. This was highlighted by the US Federal Reserve earlier this year.

With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.

It moved to what we might call average inflation targeting as a way of justifying easy monetary policy. But stuck to 2% as a level and crucially for this purpose did so from below as in October PCE inflation was running at an annual rate of 1.2% having recently been in a 1% to 1.4% range.

If we return to the range issue then I would suggest this is not an area where comparisons with Argentina and Turkey are welcome.

The current mandate, set in 2016, requires the RBI to keep headline inflation at the 4% midpoint of its target range. The band — a broad range of 400 basis points within which the central bank has sanction to operate — is the widest in Asia, and only matched by Turkey and surpassed by Argentina.

A sub-plot to this sort of thing is that when a silly idea appears someone rushes to suggest something even sillier.

Economists like Bloomberg Economics’ Abhishek Gupta have argued in the past that the headline inflation measure used now is too volatile and the central bank should rather target core prices, which strips out oil and food costs. Food carries nearly 50% weight in the CPI basket.

India has a large number of poor people for whom the prices of such necessities can be as vital as life or death so ignoring them is a really bad idea. Regular readers will recall the issues with India’s staple vegetable the onion.

The price of onion has been skyrocketing for quite some time now. The kitchen staple was available for ₹20 per kilogram a few weeks back. However, people now have to pay over ₹80 per kilogram. In some cities like Delhi and Mumbai, the prices are much higher at ₹100 for a kilogram of onions.

That was from Business Insider in late October.

What is inflation in India?

I doubt many of you will be surprised to read this.

The growth rate of India’s retail inflation, which is measured by the Consumer Price Index (CPI), climbed 7.61 per cent in the month of October. ( The Indian Express)

We see that food inflation is 10.16% and if we narrow down to vegetables it is 22.51%. Some upwards pressure on food inflation may come from this.

MUMBAI (Reuters) – China has begun importing Indian rice for the first time in at least three decades due to tightening supplies from Thailand, Myanmar and Vietnam and an offer of sharply discounted prices, Indian industry officials said.

The numbers are not specific about whether there is any pork price pressure but we do now that meat and fish as a category is rising at 18.7%.

The Reserve Bank of India

Here is the Governor’s statement from the 4th of this month.

Let me begin by setting out the thinking that went into the MPC’s decision today, and its rationale. The MPC was of the view that inflation is likely to remain elevated, with some relief in the winter months from prices of perishables and bumper kharif arrivals. This constrains monetary policy at the current juncture from using the space available to act in support of growth.

That is revealing and came with something of a cry for help.

A small window is available for proactive supply management strategies to break the inflation spiral being fuelled by supply chain disruptions, excessive margins and indirect taxes. Further efforts are necessary to mitigate supply-side driven inflation pressures.

Without it they see inflation remaining as a problem.

The outlook for inflation has turned adverse relative to expectations in the last two months. While cereal prices may continue to soften with the bumper kharif harvest arrivals and vegetable prices may ease with the winter crop, other food prices are likely to persist at elevated levels. Cost-push pressures continue to impinge on core inflation, which could remain sticky.

Switching to the overall economic position this is their view.

 Taking these factors into consideration, real GDP growth is projected at (-) 7.5 per cent in 2020-21: (+) 0.1 per cent in Q3:2020-21 and (+) 0.7 per cent in Q4:2020-21; and 21.9 per cent to 6.5 per cent in H1:2021-22, with risks broadly balanced.

So the Indian worker and consumer have been hit hard by a combination of a contracting economy and high inflation in what has been a mix described by Britney,

With a taste of your lips, I’m on a ride
You’re toxic, I’m slippin’ under
With a taste of a poison paradise
I’m addicted to you
Don’t you know that you’re toxic?
And I love what you do
Don’t you know that you’re toxic?

Comment

This is a bad day for the Reserve Bank of India ( RBI). It has eased policy into an inflation outbreak and now finds itself trapped. If we switch to the value of the Rupee it is noticeable by its absence in the statement with only an implicit mention here.

 As a consequence, surges of capital flows have flooded into India. The Reserve Bank has been taking measures for dampening volatility and enabling orderly evolution of the exchange rate in consonance with underlying domestic fundamentals.

At 73.6 to the US Dollar or a bit less than 4% weaker than a year ago we have something not much different to other years.

I do note however that the RBI has managed to perform what is the primary role of central banks in these times. Oil the wheels of government spending.

The Reserve Bank’s role as the debt manager and the banker to the government was tested to the hilt in 2020, marked by the highest ever level of market borrowing. Our policies have resulted in the lowest weighted average cost of borrowing in 16 years and the highest weighted average maturity of the stock of public debt on record. The weighted borrowing cost for the centre stands at a new low of 5.82 per cent as on December 1 even with additional borrowings for state governments as against 6.88 per cent during the corresponding period of last year.

By today’s standards that looks high so the real rationale behind all this is likely to be the Indian government wanting to borrow even more cheaply.

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