Taming inflation remains challenge
Mumbai: The uptick in food prices led inflation pressure and retail inflation is still hovering below the RBI's margin of six per cent, but bringing it down to four per cent is not an easy task, observes a senior banking expert.
"The inflation target for the MPC is 4 per cent, and the critical question is how quickly does inflation come down to the 4 per cent target. The danger which I see is that it is not showing sign of coming down to 4 per cent so quickly. Even when you look at mid-2022, the projections are suggesting that inflation would be around 5 per cent instead of 4 per cent. That is cause for worry," Prof Jayanth R Varma, MPC member, told Bizz Buzz.
He further added that "the worry is also about expectations. When people have seen high inflation for two years, they start thinking that high inflation is a fact of life, and start planning accordingly. Then it becomes a self-sustaining expectation as businesses starts increasing prices and consumers don't resist. Inflation of 5 per cent then just gets ingrained in the system. The challenge is to bring inflation down to around 4 per cent before expectations of 5 per cent inflation get entrenched."
Turning to inflation, the whole question is how soon will the inflation come down. We have gone through a once in a century pandemic and there was a significant disruption to the supply chain. Domestically and globally too, due to shortage of many items, inflation is running high. That again is understandable. The hope is as the situation eases, the inflation should start coming down.
Varma further said that the projected 9.5 per cent GDP growth for this year looks very good. But all that it does is to wipe out the negative growth of the previous year. "We will have a sort of comeback to pre-pandemic levels. I mean FY21 and FY22 will cancel out and we will be back at roughly FY 20 levels. Basically, we have lost two years. Normally, we should have an average GDP growth of 6-7 per cent each year, but over two years, the growth has been effectively zero, and this means that we have lost well over 10 per cent of GDP growth in this couple of years.
Moreover, there are risks even to the projected 9.5 per cent GDP growth rate for FY2021-22. And the more important question is really about what kind of growth we will be having in 2022-23."
While hoping that India will achieve high growth in financial year 2022-23, Varma said that 9.5 per cent of growth in 2022-23 can't be expected as the growth rate in 2021-22 was from the low base of FY21. He expects a reasonable growth in 2022-23, because there are lots of things which are going right. Exports are booming, and the services sector is also coming back. Aviation is improving, and even the hospitality sector is also improving. We are already highly vaccinated, and by March-end we are likely to achieve much more. I think that the economy should be doing well. But there are risks to this scenario and that is what we worry about in the MPC.