By Disha Rawal

There are few things that attract as much public attention to economic policy as onion prices and for a good reason. Food prices impact people’s lives directly and crucially, and it is indeed inflation in these the prices of these very items that influence the impact of monetary policy on people.

Consumers, however, have reasons to be happy right now, as retail inflation has slowed down to 5.07% in January, after reaching a 17-month peak, according to the Central Statistics Office. This is primarily being attributed to a decline in the inflation of food and fuel prices. This data emerges when multiple entities are challenging the macroeconomic stability of the Indian economy in the context of a widening fiscal deficit.

Could the relief be prolonged?

This year’s budget had a significant rural focus, which is both electorally and economically promising. However, this also implies that the relief from inflation may be short-lived. Firstly, the Minimum Support Price (MSP) on various crops, especially Kharif crops, has been increased substantially. This will drive up incomes and hence demand, even as it directly makes food more expensive. The second reason why inflation has come down in the first place is low fuel prices. Going by the Goldman Sachs projections for this year, this may also be reversed.

Slightly more indirect factors include an increased focus on agricultural exports and increased public expenditure. Finance Minister Arun Jaitley said that India can triple its agricultural export, and the government is going to take steps to realise this possibility. That will decrease domestic supply and drive up prices. Increased spending on rural infrastructure is an economic and social necessity. However, it may bring increased rural demand and hence, inflation with it.

Monetary policy headwinds

With fuel prices inching up, and with apprehensions that the 7th Pay Commission roll out may push up retail inflation by 0.25-0.5%, there is a strong case for the policy rates to move up. A heightened housing inflation number is expected in the coming months. Government bond yields have reached high levels, and as per the Reserve Bank, that can be accredited to fiscal slippages, making investors apprehensive. With a higher than expected fiscal deficit (3.5%) as compared to the targeted 3.3%, the fiscal deficit is being seen as a threat to macroeconomic stability, alongside high inflation. All these factors coupled together may bring about higher policy rates in the future, which may serve to bring down inflation.

However, another important development is that industrial growth numbers saw a rebound in the month of January. With the costs of lending becoming higher, growth may take a hit again. The government has been criticised for reforms like GST on the grounds that industrial growth has slumped as a consequence.

This budget was being seen as an electoral instrument. Electoral success requires low retail inflation, but this must be achieved alongside low unemployment rates. This again brings out the challenge of ensuring growth, even when keeping inflation under check. Economists like Raghuram Rajan have continuously emphasised that fiscal discipline is the cornerstone of this kind of macroeconomic success. The government will, thus, have to balance the demands of infrastructural growth, especially in rural areas with macroeconomic stability.

Featured image source: Wikimedia Commons

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