The index of industrial production (IIP) crashing to its two-year low of
3.3% comes as no surprise, its cause is a shock.
Reasons for crashing
- driven by a contraction in capital goods
- Increasing policy rates eleven times since March 2010, ostensibly to control inflation. But the confines of monetary policy don't offer much room for manoeuvre and have proved ineffective before global commodity prices, particularly food and fuel.
- Interest rate hikes cannot fix structural issues. Food inflation, for instance, is being driven not by wheat or rise but by fruits, vegetables and milk. This is not surprising: with prosperity, people move to richer diets, causing structural changes. How can interest rates change this?
- The solution to India's inflation doesn't lie with RBI, but with the ministries of finance and agriculture. On food inflation that has remained high for a disturbingly long period, a World Bank report has suggested four policy options
- foodgrain stock management,
- increased productivity,
- building safety nets and
- managing macroeconomic risks
- none of the above are monetary.
As evidence stands, all that monetary policy has done is strangulate the
India growth story - without being able to control a persistently high
inflation.
It is time for our economic managers to concentrate on how to deal with
structural changes.
0 comments:
Post a Comment