Challenges Ahead and Agenda for the Future

Challenges Ahead and Agenda for the future

Though there has been a consensus on the idea that monetary policy have the tools to fight decisively against inflation, in our view it would require significant monetary and fiscal coordination aided by structural changes in the economy to fight inflation. 

Measuring Inflation

With the setting of inflation target by the Monetary Policy committee, it is important that the inflation measure addresses the issues regarding the appropriate choice of the reference population, weights in the index being representative of the consumption basket of the target population and the reliability and frequency of the price data that goes into the indicator. Efforts should be made to capture data from semi-urban and rural area for measures like the household’s 3-month ahead mean inflation expectations to enhance its representation.

Supply Side management

Investments to augment agricultural output and productivity is must to harness the demographic dividend by providing nutritional security to its burgeoning young populace. Low per capita availability of cereals and pulses is a major concern and calls for addressing the supply demand imbalance by investing in public distribution systems  and modernizing the supply chain to unclog structural bottlenecks. To insulate ourselves from global fuel and commodity supply shocks, policy measures must economize usage through energy conservation, investing in alternate sources of renewable energy and domestic exploration of oil and gas. A robust pricing mechanism should be deployed to allow price signals to balance the demand of petroleum products. It is also imperative to maintain exchange rate stability to cushion transmission of international price pressures in commodities, particularly crude oil.

Demand Side Management

Inflation due to overheating occurs when the economy grows above its potential, which in the case of developing country like India could impede growth. Thus to augment the potential output of the economy, efficient fiscal management and improvements in the quality of government expenditure should be made by shifting aggregate demand away from consumption to investment.. The fiscal multiplier works better with investment, but can also crowd out private investments, thus a credible fiscal consolidation should be part of the policy objective.