IIn November, a Cabinet minister reportedly stated at a press conference that the Reserve Bank of India (RBI) should focus on growth and not worry about food price inflation. Although the minister clarified that he was speaking in a personal capacity, it is not in the spirit of things that once the central bank has been given a mandate to target an inflation index that includes the price of food, a member of the executive branch advises it in any way, let alone urges it to focus on something else. The comment may reflect some nervousness on behalf of the government about the performance of the economy. This would not be unfounded. The media have referred to declining consumer spending in the economy, although this is not clearly reflected in national income statistics, which are available until 2022-2023. But there are reports of slow sales growth of companies in the fast-moving-consumer-goods (FMCG) segment during the current financial year. This is a fairly reliable source of information on consumption growth. However, there is a more overarching reason why the government is concerned about the growth of the economy, and it is based on a longer view.
Not a reassuring story
We now have ten years of national income data since 2014, allowing a broad assessment of economic performance during the Modi government’s tenure. First, the average annual growth of the economy at the aggregate level has been lower since 2016-2017. The decline is also substantial. At 7.1% for the period 2004-05 to 2015-16 and 5.2% for the period 2016-17 to 2023-24, this amounts to 27%. The national income data for the sectors is less current, but sufficient to make a reliable assessment, and could look like this. Of the eleven sectors at the initial disaggregation level, only one, namely ‘real estate’, has shown a higher growth rate since 2014. Interestingly, despite all the policy focus on manufacturing, this sector actually slowed down after 2014. from 2006-07 to 2014-15, growth was over 7% per year, after which growth slowed to just over 5%. This degree of decline in the growth rate of industrial production over successive growth phases is by far the highest since independence, while the percentage increase in the growth rate of the real estate sector since 2014 is not the highest, having been exceeded in the 1980s. This would not be a comforting story for a government proud of its growth performance.
Although the government speaks out about growth, it remains silent about inflation. This is significant as the October inflation figures show that it crossed the 6% mark, the highest tolerance level given to the RBI, while food price inflation crossed the 10% mark. There is an assumption that is widely held by a section of the economics profession and was expressed by the minister when he encouraged the RBI to ignore food price inflation. It is because the price of food is volatile, and its fluctuations cancel out over time.
A structural problem
However, this has been proven to be wrong, at least in India. Food inflation rose in 2019-20 and has remained high since then. That growth rose before the COVID-19 pandemic and has persisted even as growth has recovered gives us an idea of why this assumption is incorrect. Recent inflation in India is not linked to some temporary supply chain disruptions, such as in the United States, where inflation has fallen significantly after the pandemic, even as growth has recovered. Inflation in India is a structural problem that reflects the kind of growth the country is experiencing, with agricultural production not growing at the rate that demand for its products is increasing. Furthermore, and relevant in the context, food price inflation is causing a wage price spiral in the rest of the economy, which could continue for some time even if food prices fall.
The welfare implications of the inflation we are currently experiencing are clear. High inflation, especially of food products, negatively impacts the well-being of those whose incomes do not keep pace with inflation. The consequences for growth are less clear, but are certainly there. As household budgets are stretched to accommodate higher food costs, demand for other goods and services will have to grow more slowly. Growth in non-farm production and employment is now slowing. Such a mechanism has likely played a role in slowing the growth rate of industrial production in recent years. From the data in the Ministry of Statistics and Program Implementation’s ‘National Accounts Statistics 2024’, we can see a correlation between the increase in food price inflation from 2019-2020 and output growth since then, with the latter’s annual rate of change actually negative in two of the following five years. So while the minister is right to suggest that the RBI’s ability to contain food inflation is weak, he is wrong to suggest that food price inflation does not need to be controlled. If food price inflation were removed from the RBI’s remit without an alternative proposal for its control, India would be left without an anti-inflation policy. Unchecked inflation can throw sand in the wheels of growth itself.
Currently, the problem facing the Indian economy is not lack of growth. The preliminary estimate for GDP growth in 2023-2024 (over 8%) is quite high by historical standards. The problem lies in its uneven distribution across the population, partly caused by food price inflation. The minister’s observation should prompt the government to reorient current economic policy from growth to inflation.
Pulapre Balakrishnan, Honorary Visiting Professor, Center for Development Studies, Thiruvananthapuram
Published – 25 Dec 2024 03:12 IST
