One misses Atal Behari Vajpayee sometimes. When price of tomatoes is going through the roof, we hardly hear any of those ringing metaphors. No one is turning puns on tomato prices as effectively as Vajpayee had once done on onion prices.
A general election is fast approaching and prices are a basic feedstock for electioneering. It is normal to expect politicians to go into overdrive with prices, particularly with sensitive ones like onion or, lately, tomatoes. Incumbent governments have to leave on price situation.
In his latest monetary policy statement on August 10, the Reserve Bank governor, Shaktikanta Das, has used a clinical phrase in describing price shocks in sensitive items. He described these as “idiosyncratic price shocks”, thereby taking out the sting in the tail.
As a technocratic guardian of financial architecture tasked with maintain stability of prices, his defanging description is apt. He suggests that these would have to be looked through and the gaze have to be fixed on the overall price trends. However, at the same time, he reiterates that if the “idiosyncratic trends” show persistence then we have to “act”.
The Reserve Bank is the custodian of price stability. It has been empowered to maintain price stability. However, at the same time, the RBI’s actions have deep repercussions throughout the economy, including the pace of the economy and its overall growth. Hence, the task has twofold responsibility: maintaining price stability without hampering overall growth.
This calls for a very much layered and nuanced response from the monetary authority. This is what the Reserve Bank governor appears to have set for himself.
In conventional macro-economics the brand spectrum anti-biotic for price control is a hike in interest rates to curb demand. But that also impinges on the pace of the economy and introduces a sluggishness. In effect, the US Federal Reserve is faced with this stark choice. It is raising interest rate to rein in somewhat defiant US prices.
The fear is that any relentless pursuit of inflation control through monetary policy should bring in a sort of recession and push up unemployment. The US employment levels are at historic high and despite several rounds of interest hikes to, once again, a historic high, unemployment has not increased. But the experts anticipate this should happen in a short time.
The RBI governor cannot really afford to this. It is not practical to raise the blunt interest rate instrument for price control, through inducing a kind of slack in the economy. The pace of growth will suffer. The choice is more hazardous here. We have to maintain prices in a framework of rapid growth.
As the governor has put forth, the problem before him is that the price spurts in select items, like tomato now or onion in an earlier period, are believed to be short term. The policy statement of the RBI makes it plain upfront. He states:
“Headline inflation projection for Q2 of 2023-24 has been revised up substantially, primarily due to the price shock from vegetables. Given the likely short- term nature of these shocks, monetary policy can look through high inflation prints caused by such shocks for some time.”
However, the dilemma is that such price shocks gives rise to an endemic inflation expectation. That is, people start believing that prices should rise in the immediate future and starts behaving accordingly. This becomes a self-fulfilling cycle.
The frequent incidences of recurring food price shocks, however, pose a risk to anchoring of inflation expectations, which has been underway since September 2022, the monetary policy points out. The way out could be supply side economics in the current situation.
“The role of continued and timely supply side interventions assumes criticality in limiting the severity and duration of such shocks.” This is the specific policy prescription of the central bank, it appears.
Hence, the RBI has set store by supply side interventions, instead of blunt demand control measures as a corrective for “idiosyncratic price shocks”. For all one knows this is might prove to be good economics as well as good politics. Why?
In a situation of general election, a government cannot face electorates with a sagging economy. At any rate, the incumbent government’s entire stance is that it has re-energised the Indian economy. Prime Minister Narendra Modi opening gambit is that in his third term India will become the third largest economy in the world. That’s a tall claim and to achieve it, India must grow at a steady pace throughout.
The dilemma is a government cannot face electorates with shooting prices either. For achieving this twin purpose one has to properly look into the nature of current price trends. The consumer prices are rising no doubt because of the sudden spurts in vegetables, more particularly in a few items. The vegetable prices generally soar in the summer months and then slump post October.
To tackle the tomato prices, for example, the finance minister has announced imports from Nepal which in itself is not a bumper producer of food items. But, nevertheless, whatever is available from wherever. But there are more sinister price dynamics as well. There are fears of some spurts in food grains prices — rice and wheat.
There are severe shortages of these all over the world and the global prices of food grains are rising, mainly consequent upon the war in Ukraine. Geo-politics is influencing price behaviour. India should not much worry over such inflation in food grains prices. We have large stocks of food grains, much in excess of the buffer stocking norms.
Yet, already steps have been initiated — there is some restrictions on exports of rice. India is a major exporter of rice to the global markets and hence the price of rice is rising all over.
Secondly, although we are more than comfortable in wheat production and at times the buffer stocks are bountiful, India is securing imports from Russia. This is impinging upon attenuated global supplies. But nonetheless, the government is more than acutely aware of the need for plentiful supplies at home.
From the standpoint of overall political economics, the RBI and the government seem to be on the same page. This does not happen most of the time. Hopefully, with the favourable constellation of stars, we will see overall price stability in a growing economy. (IPA Service)
By Anjan Roy
