A Greater Watch on Inflation Is Needed in 2023, Says the Finance Ministry
As inflationary pressures may stay high in the upcoming months, the government and the Reserve Bank of India (RBI) would need to exercise greater caution, the finance ministry said on Tuesday.
But it also stated that due to new products entering the market and various government actions, including preventative ones, the current price surge of some food commodities, such as tomatoes, is anticipated to be temporary.
“Going forward, while domestic consumption and investment demand are expected to continue driving growth, global and regional uncertainties, and domestic disruptions may keep inflationary pressures elevated for the coming months, warranting greater vigilance by government and the RBI,” the ministry stated in the Monthly Economic Report for July.
The ministry used the performance of many high-frequency indicators, which “highlight the emergence of the green shoots of a private capex upcycle,” to claim that increased government capital expenditure provision was driving private investment away.
Headline While core inflation remained at a 39-month low in July 2023, CPI-C inflation rose to 7.4%, driven mainly by a few essential food items. The Black Sea Grain deal’s termination by Russia and dry circumstances in important wheat-growing regions led to an increase in cereal prices worldwide. Domestic issues like the white fly illness and the uneven distribution of rainfall put pressure on vegetable prices in India concurrently.
As seen by sales of two- and three-wheelers and fast-moving consumer products, the ministry highlighted that rural demand had maintained a sequential pace in Q1FY24 as a healthy rabi crop reinforced spending capacity. It said further increases in the minimum support price and the likelihood of robust kharif harvests will strengthen rural demand.
With the advent of fresh inventories, tomato prices in the domestic market have already begun to drop. “Additionally, increased imports of tur dal are anticipated to reduce pulse inflation. The report stated that these elements, together with recent government initiatives, may soon result in a moderating of food inflation in the months to come.
On August 10, the Reserve Bank of India (RBI) Monetary Policy Committee updated its CPI inflation prediction for Q2-FY24 upward by one percentage point to 6.2%. The yearly inflation rate also increased from its initial forecast of 5.1% to 5.4% for 2023–2024. August’s monsoon rainfall has so far fallen short by around 7%.
The external sector must be closely monitored to boost goods export growth in the face of weakening global demand. As long as remote work is still famous, which is often reflected in the development of Global Capability Centres, services exports will likely continue to perform well, according to the ministry.
It reaffirmed that stock markets in developing nations may be subject to downside risks to global stock markets as a result of rising bond rates and expectations of more monetary tightening.
After around a year of relative easing macroeconomic headwinds, maintaining macroeconomic stability may be returning as an essential policy priority.
In its most recent monetary policy review, the MPC chose to maintain the current policy rate while concentrating on the gradual removal of accommodation to ensure that inflation gradually converges with the objective while fostering growth.
In order to guarantee that liquidity levels do not interfere with the process for transmitting policy rates, the RBI has also set a temporary Incremental in Cash Reserve Ratio of 10% on banks’ incremental net demand and time liabilities between May 2023 and July 28, 2023.
As a result of the RBI’s temporary removal of liquidity and GST outflows, which had an impact on banks’ financing, the banking system’s liquidity fell into a deficit for the first time since end-March. As of Monday, there was a Rs. 23600 crore shortage in liquidity.
As nations grapple with the economic consequences of the COVID-19 pandemic and subsequent recovery efforts, inflation has emerged as a chief concern for policymakers and citizens alike.
In a significant move, the Finance Ministry has recently issued a directive calling for heightened vigilance in monitoring inflationary trends throughout 2023.
This article delves into the motivations behind this call to action, the tools the ministry plans to employ, and the potential implications for the economy.
Inflation rates have been steadily increasing since 2021, exacerbated by supply chain disruptions, increased commodity prices, and pent-up consumer demand.
Despite numerous policy measures to stimulate economic growth and employment, inflation has proved to be a persistent thorn in financial planning.
Currently, the inflation rate hovers around the uncomfortable mark of 5-6%, significantly higher than the target range of 2-3%.
Considering that high inflation tends to erode the purchasing power of consumers and can have a cascading impact on interest rates and investment, the Finance Ministry’s call for greater vigilance is both timely and crucial.
As prices rise, the buying power of money decreases, affecting the quality of life. Central banks might increase interest rates to combat inflation, thereby making loans more expensive.
High inflation rates make future planning difficult for both consumers and businesses, potentially slowing down economic activity.
Regular data will be collected to monitor the prices of essential commodities, housing, and energy. Big data analytics and AI-based predictive models may be employed to foresee trends.
There will be frequent consultations with the central bank to review monetary policy tools like interest rates and money supply that can directly impact inflation.
The ministry also plans to engage with market regulators to ensure no unfair price manipulation in critical sectors.
Changes in tax rates, government spending, and subsidy allocation are also on the table as potential mechanisms to control inflation.
While the ministry’s call for action demonstrates a proactive stance, the task could be more straightforward. International factors such as oil prices and geopolitical tensions can also affect inflation, and these are often beyond the control of national policymakers. The challenge will be in balancing the need for economic growth with the imperative to keep inflation in check.
The Finance Ministry’s directive to maintain a closer watch on inflation in 2023 is a significant move that acknowledges the complex, multi-faceted nature of economic recovery in the aftermath of a global crisis.
While the mechanisms and tools to monitor inflation are robust, their successful implementation will be vital to achieving economic stability.
It is clear that combating inflation is not the responsibility of the Finance Ministry alone; it requires coordinated efforts across multiple facets of government and society.
As we move into 2023, the spotlight will be on how effectively these measures are implemented and their impact on reining in inflation.
