One of India’s challenges is that, as the country’s wealth develops, it fails to adapt its policies. Economic rules intended for a much poorer economy hinder growth. This is especially true for food prices and monetary policy.
India’s agricultural subsidy scheme, for example, was developed in the 1960s to increase domestic grain output. That may have been acceptable for a postcolonial country experiencing mass starvation. But it is not appropriate for an industrializing, food-surplus country that needs stable vegetable prices instead.
When it comes to the monetary aim, policymakers face a similar dilemma. Approximately a decade ago, the Reserve Bank of India was formally instructed to aim for 4% inflation. In his key policy document last month, the government’s chief economist argued that excluding food prices from the central bank’s inflation objective makes sense. Monetary policy cannot address supply-side issues. Food costs in India are determined by a variety of supply-side economic constraints. Grain prices are determined by the government’s mandated payments to farmers. Vegetable and protein supply chains are fragmented, causing price fluctuations in response to transitory availability and transportation issues.
The RBI keeps interest rates higher for longer than necessary. Core inflation, excluding food and fuel, has remained well below 4% for some time. However, the central bank has not decreased interest rates because Indian food prices are higher than world averages. Food inflation has fallen in recent weeks, not due to changes in policy or demand, but due to the end of a summer heat wave.
The RBI’s rate-setting panel has met nine times in a row without a cut. Each week that an economy starved for investible money must endure a higher-than-necessary real interest rate results in lost earnings, growth, and jobs. India’s CPI requires urgent revamping. Many of the nation’s inflation-targeting peers in the emerging world outperform us.