The Reserve Banks mission impossible? Arvind Subramanian Taming inflation may prove difficult because the social consensus in favour of moderate inflation appears to have eroded, writes Arvind Subramanian. Today, three aspects about inflation in India are worrisome. It is unprecedentedly high. It may have been the key proximate cause of the recent rupee crisis. And taming it may prove difficult because the social consensus in favour of moderate inflation has eroded. Consider each. First, inflation has been historically high not in absolute terms but relative to the rest of the world, which is both striking and unrecognised. Figure 1 (top line) shows that high as Indian inflation been recently, it was actually higher in two previous episodes: the late 1970s and late-80s to the early 1990s. But the lower line of Figure 1 shows that since 2008, Indian inflation has not only been greater than in comparable low and middle income countries but the differential is a staggering unprecedented 4-5 percentage points. India as a paragon and beacon of price stability amongst the developing world is history. India is now Latinised, although ironically Latin America itself has moved on. Second, the role of inflation in the recent crisis is best understood in light of something unusual that happened in the run-up to it. India’s current account deficit (CAD) surged even as growth started decelerating. For about 10 quarters, growth declined but the current account increased from about 1.5 per cent of gross domestic product (GDP) to over 5 per cent Figure 2. The pattern in most emerging market crises is for growth to surge that sucks in imports, leading to higher CADs. This growth surge can either be fuelled by government spending (India in 1991 or Latin America in the 1980s) or by private spending (Asia in the late 1990s, and emerging Europe in the 2000s). The flip side is that growth declines should lead to falling imports and improving current account positions. This did not happen.
Posted on: Tue, 19 Nov 2013 20:31:52 +0000
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