PRICE STABILITY VERSUS ECONOMIC GROWTH

 Economic policy making be it - monetary policy, fiscal policy, trade policy or any other variant,  mainly focus on achieving growth in national income ,output and employment on the one hand and maintaining stability in the price level and balance of payment equilibrium on the other.Eventhough both monetary and fiscal policies are utmost important in achieving  growth and stability, generally maintaining price level, exchange rate and balance of Payments equilibrium is  largely the primary task of the monetary policy administered by the country's central bank namely Reserve Bank of India.However there is an inherent conflict between the objectives of economic growth and price stability.For instance when the demand for products and services rises due to increase in investments on a large scale it leads to spurt in incomes consequently leading to  inflationary rise in prices and it will persist with growth of the economy. RBI has already established a monetary policy committee (MPC) to examine related matters and make recommendations to achieve both growth and stability.On December 7 MPC meeting addressed the issue of  achieving price stability, bringing down the consumer price index (CPI) inflation to  4% within the band of +/-2% while supporting growth. Committee decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points to 6.25%,as a result Standing deposit facility rate stands at 6.00% and marginal Standing facility rate and bank rate at 6.50% respectively.In effect RBI policy has resulted in  withdrawal of accommodation specifically to ensure that inflation remains within the target band  while supporting growth .

It is heartening to note that an interim relief in Consumer Price Index, happened after ten months of continuous runaway price increase of over 6% which declined to 5.88% in November 2022.Since April 2022 when retail prices peaked to a 8 year high rate of 7.8%, and 5 of the 8 months in 2022 registered 7% inflation , subsequently it had dropped to 6.77% in October and further 5.88% in November .It is mainly due to decline in consumer food inflation which dipped to 11 month low of 4.67% in November from over 7% in October. Food inflation account for about half of the consumer price index.  Cooling commodity prices and Government intervention for keeping food prices in control especially those of cereals, pulses and edible oil were attributed to be responsible for keeping down the consumer inflation under control.MPC observed that CPI inflation forecast for 2022-23 at 6.7% while marginally raising the Q3 and Q4 FY 23 projections to 6.6% and 5.9% respectively. Thereafter it expects head line inflation to average 5% in Q1 and 5.4 in Q2 of 2023-24 FY.On the other hand Wholesale price index (WPI) another measure of price rise also witnessed a sharp decline of below 10% for the first time in 19 months in October. Further WPI inflation fell from 8.4% in October to 5.85 % in November 2022 ( as against 14.87% in November 2021) mainly due to fall in  food item prices  from 6.5% in October to just 2.25% in November. At the same period Inflation in primary articles at wholesale level halved from 11% in October to 5.5% in November.Similarly even  manufactured products also witnessed price rise easing from 4.4% to 3.6% over the same period.The decline in WPI is primarily attributed by observers to fall in prices of food articles, basic metals, textiles, chemicals and chemical products and paper products .Latest data in the external sector showed some resilience so that India's overall trade deficit for goods and services has decreased from $13.19 billion in November 2021 to $11.11billion in November 2022 .Merchandise exports for the period April-November 2022 were US $ 295.26 as against US $ 265.77 during the same period in 2021. Merchandise imports also increased from US $ 381.17 billion during April- November 2021 to US $ 493.61 billion in April- November 2022..Accordingly the merchandise trade deficit during the same period increased from US $ 115.39billion in April-November 2021 toUS$198.35  in April-November 2022.It has been observed that global inflation trends indicated that while inflation in the USA recorded 7.1% in October from 8.2% in September, inflation in UK has increased to 11% and European union 11.5%, consequentially India is also forced to import significant share of global inflation.

Analysts observed that not only achieving actual inflation target of 4% may take many more months but also the present achievement of 5.88% is not due to any fundamental change but a steep fall in  prices of vegetables and if one exclude vegetables inflation would have increased to 7.2%.If fuel price pressures increases and rupee continues to depreciates inflationary pressures may increase further.As mentioned earlier global disturbing conditions remain high. Despite global headwinds like tightening financial conditions and slowing external demand the MPC was optimistic regarding domestic economic growth. Increased focus on core inflation and RBI Governor's emphasis on need for "further calibrated monetary policy action to keep inflation expectations anchored and break the core inflation persistence" gave a hawkish  touch to the policy measures .

In any case the notion that the worst of inflation is behind us cannot be taken for granted granted as the structure and nature of price rise changed and also future and global uncertainty.Hence inflation control measures need to continue.Since the components of GDP growth in the country has indicated that consumption demand is increasing along with high frequency indicators like PMI, even if global headwinds persist India will continue to achieve moderate growth, certainly high among the emerging markets. However in terms providing jobs and livelihood more fiscal policy intervention is required than monetary policy.