Govt policies to tame inflation is flawed: expert

 RBI's tinkering with repo rates hardly had any impact on curbing inflation

Chennai:

The government has a lot to rethink on its policies on taming inflation and Reserve Bank of India’s tinkering with repo rates to control inflation has had hardly any impact, said a noted economist.

Hitting out at policy makers as well as Planning Commission deputy chairman Montek Singh Ahluwalia, who had recently observed that if inflation does not come down by February 2012 the government has to rethink on policy making, noted economist and former special adviser to the Development Research Center at the World Bank T N Srinivasan said on Monday that inflation will not come down and Ahluwalia has a lot to rethink about.

Delivering the Third R Venkatraman Endowment Lecture on ‘Recent Bouts of Inflation in India: Policy Paralysis’, the Samuel C Park Junior Professor of Economics at Yale University Prof Srrinivasan said RBI has not explained why its successive increase in policy rates 13 times since March 2010 have had little effect on inflation.

Prof Srinivasan said inflation in India is measured through Wholesale Price Index whose inappropriateness has long been recognized by policy makers. It uses retail quotations for some and wholesale prices for other commodities.

He also suggested that in addition to consumer price index, there should be a producer price index as well as cost of living index.

He said there should be a rethink on analysis of inflation away from paradigms largely borrowed from developed countries and towards one that is appropriate for the Indian context is needed.

“While the Annual and Quarterly reviews of the RBI of Macroeconomic Developments and Outlook are certainly valuable, they do not meet the need for explaining reasons for policy action or non-action as major shocks both domestic and external hit the economy,” he observed.

He also said the RBI has not laid out its analysis of the Euro crisis and its assessment of proposal for its resolution from an Indian perspective.

The global fallout from the festering euro zone sovereign debt crisis has already slowed the growth rate of India’s exports as happened in 2009 and the recent depreciation of rupee could be a reflection of rationally anticipated decline in exports and Foreign institutional Investors, he added.

Hitting out at Kaushik Basu, chief economic adviser in the Department of Economic Affairs, he said he has published two analytical papers in the Economic and Political Weekly but they do not contribute deepr understanding of the analytics of inflation let alone on policies for addressing it. “His digression on capital controls and discussion on the possible impact on inflation of policies that benefit poor such as National Rural Employment Guarantee Act do not answer the basic question about the determinants of a sustained month-after-month rise in food prices during 2009-2010.

“RBI does not follow inflation targeting in its monetary policy, nor does it use a fixed exchange rate of the rupee with a low inflation country as anchor, one would like to know how it uses in an analytical way the findings from its own periodic survey of inflationary expectations,” he said.

“The recent statement of the RBI that it reserves the right to intervene if necessary to address the depreciation of rupee seems to contradict its policy until now of letting market forces determine the rupee’s exchange rate and intervening only to mitigate the volatility in exchange rate movements,” he added.