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UdayKumar1516989
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Innumerable tasks with respect
to the economy await the winner of the parliamentary elections now under way, but two may
be mentioned and they are connected. The first is to review the
conduct of macroeconomic policy. Though it must come across as
arcane, this is an element of public
policy that makes a difference to
whether we enjoy economic security or not. This brings up the
second task for the winner, namely employment generation.
The macroeconomic policy pursued in the past five years needs
overhauling. The government has
continued with fiscal consolidation, or shrinking the deficit, while
mandating the Reserve Bank of India (RBI) to exclusively target inflation leaving aside all other considerations. This has contracted
demand. That high fiscal deficits
and high inflation can never
be good for an economy does not
justify a permanently tight macroeconomic stance. The rationale
given for one is that it is conducive
to private investment, said to be
shy of fiscal deficits and held back
by inflation. Both the deficit and
inflation have trended downward
in the past five years, yet investment as a share of national income
has remained frozen.
Inflation targeting
Now, while fiscal consolidation
was something the Narendra Modi
government had inherited, it has
taken credit for having moved India onto the path of ‘inflation targeting’. Arguably though, India
has seen a virtual inflation targeting since 2013 when the policies of
the RBI became more closely
aligned to the practices of central
banks in western economies. Thus
in 2013-14 the real policy rate saw a
positive swing of over four percentage points, and it has more or less
remained there. Admittedly, at
double digits, infllation had been
high in 2012-13 but that could have
been due to abnormal hikes in the
procurement price and not due to
runaway growth. However, as the
theory underlying inflation targeting asserts that it reflects an overheating economy, an interest rate
hike is triggered. The high interest
rate regime in place since 2013
could not but have had a negative
impact on growth by raising the
cost of capital to industry. The negative impact of a high policy rate
may, however, have appeared elsewhere too.