The Usual Tools Are Unlikely To Fix Our Inflation Problem

Context: High consumer and wholesale price inflation numbers amid low/no growth have made matters interminably worse for India’s economy.

Temporal rise in inflation is bound to occur as decentralized lockdown curbs

• Sporadic spending pattern: Due to rising uncertainties -
  • As economic agents (say, firms or households) would act by their own devices to decide what, where and how much to spend, without taking into consideration whether sufficient supply of a given product or service is available.
  • For e.g. service providers like saloon are about to operate on low capacity despite high demands due to the risk of exposure to infection. This will push the prices up.
• Monetary policy may be ineffective: Since the factors behind local inflation are no longer explained by the causal binaries of demand-pull and/or cost-push alone (which are relevant in normal times).

Way forward

• Greater direct income support through unconditional cash transfers to households: As this help drive both private investment and employment.
  • Discretionary expenditures are inadequate such as rations, food stamps, or increased allocation for rural employment, as it would be targeted and covers only a specific section of the population.
• Need for fiscal-monetary support measures: To address novel behavioural causes, such as pandemic-driven anxiety, rising uncertainty among consumers and capital scarcity among producers.
  • Pursue a localized and counter-cyclical fiscal-monetary approach that combines instruments of direct government support with easy liquidity and bank credit provisions so that economic agents have a wider set of choices.