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Jun 27, 2022

Inflation, RBI and the Tale of Two Economic Advisors

economy
The present economic advisor revels in the 'exemplary resilience' shown by the Modi government in recovering from COVID-19, while the former advisor has highlighted the human cost of this very 'recovery'.
Former chief economic advisor Arvind Subramanian (left) and current CEA Anantha Nageswaran. Photo: PIB and Twitter

Earlier this month the chief economic advisor Anantha Nageswaran praised the government for its quick and precise policy steps to aid the recovery from the pandemic. This, he said, was duly supported by the Reserve Bank of India’s (RBI) timely interventions.

It is curious that just days after, a former chief economic advisor to the same government, Arvind Subramanian, raised questions about the autonomy and integrity of the RBI as an institution as it has been converted into a “mere extension” of the government. Subramanian is said to have felt frustrated by the intransigence of the government in terms of following his advice and finally cited personal reasons to quit.

The divergent analysis of the economic situation in the country from the two advisers came on the heels of the latest Households’ Inflation Expectations Survey results of the RBI. It said that the “majority of the households expect general prices and inflation to remain high over three months and one year ahead horizons.” Results showed that households’ median inflation perception has increased by 10 basis points (bps) and 30 bps for three months and one year ahead periods, respectively. (A basis point is one hundredth of 1%.) The bi-monthly monetary policy analysis has forecast that inflation is expected to be above 7% in the first two quarters of the current fiscal.

While the mandate of the RBI is to keep inflation rate at around 4%, since 2019, it has been above the 6% ceiling for 56% of the time. Subramanian says, “Somehow, ceilings turned into floors, until even these “floors” were breached for long periods.” This, he says, has been in part to do with the RBI’s efforts to act as the government’s face-saver instead of being true to its own mandate. From keeping the interest rates on government securities low, to paying huge dividends to the government – the RBI seems to have allowed inflation to drop from its list of priorities. The consequences are being borne by the poor, which is the vast majority of the population.

Also read: Raging Inflation: Why Your Chicken Curry Is the Most Expensive It Has Been in 5 Years

While the present advisor revels in the “exemplary resilience” shown by India in recovering from the pandemic, such claims are plain rhetoric in the face of reality. Let us interrogate the claim by looking at the idea of resilience. A study of domestic workers coping with the pandemic attempts to measure “resilience” as a family’s income and savings minus debt. It finds that while incomes started recovering even at a diminished level, indebtedness had severely diminished a family’s resilience. We are talking about people with precarious jobs somehow standing on the ground who find it difficult to “recover” as the ground erodes under successive jolts.

CPI or WPI? Which is better? Credit: Reuters

Representative image. Credit: Reuters

Subramanian, the former advisor, seems to point towards the human cost of “recovery” as the poor have been reeling under the cumulative impact of notebandi (note ban), goods and services tax, COVID-19 lockdown and the crushing inflation.

As of today, the high inflation expectation of the people is bound to affect the already dwindling demand in the economy thereby further reducing money flow and earning potential of the poor. Anantha Nageswaran not only tries to downplay the concerns around inflation, but also speaks of key indicators of the economy having crossed their pre-pandemic levels including GDP, private consumption and fixed investments.

Economists have repeatedly called the tag of the “fastest growing economy” used by the advisor as infantile at best and misleading at worst. It is normal for the economy to contract suddenly during an abnormal situation like a pandemic, lockdown, etc., and recover once it regains some amount of normalcy with the businesses, manufacturing and other sectors starting to function.

Dropping sharply and then rising to reach its earlier level does not translate into what one means by a rapidly growing economy. That apart, there are serious concerns about the veracity of the GDP figures given that the government continues to use the organised sector as a proxy to calculate the contribution of the unorganised sector to the GDP. This is despite the fact that in the last eight years one of the Modi government’s biggest “achievement” has been the tectonic shifts it has brought about in the landscape of the unorganised sector as it has been battered by successive waves of disruption starting from demonetisation to GST and then the lockdowns.

There has been a clear shift in demand towards the organised sector, thereby accounting for the super-profits earned by some of the bigger players even as the small and micro sectors were decimated. Senior economist professor Arun Kumar says that this does not get reflected in the government GDP figures. This, he believes, in turn calls into question the other tall claims about private consumption and investments as these are also calculated in relation to the GDP figures.

Also read: Two New Papers on Poverty Levels Shine a Light on Need for Reliable Official Data in India

Now, with the advisors of the government themselves at loggerheads, let’s look at what a sound advice would sound like. First, it would be good to acknowledge the ailment. No matter how much the government tries to externalise the crisis, we are not in a downward spiral only due to the virus, or the war in Ukraine, or Jawaharlal Nehru or even Aurangzeb. The sole “credit” for this goes to the policies that have been pursued by the government over the eight years. From the fourth quarter of 2017-18 onwards, there was a secular decline in the official GDP growth rate from 8.1% to 3.1% in the fourth quarter of 2019-20. This is way before the pandemic.

It would also do good to recognise the alarming unemployment figures that show that more than half of our unemployed youth are not even looking for jobs anymore. The labour force participation rate has reduced from 46% in 2020 to 40% in 2022. As per the Centre for Monitoring Indian Economy (CMIE), the number of working women has gone abysmally low at 9%. And studies have shown that although all caste groups suffered job losses after the lockdown, the rate was three times higher for Scheduled Castes than the upper castes.

For any corrective prescription it is crucial that one has the correct diagnosis of the problem and its obvious symptoms. One among them being the grotesque wealth and income inequality that we seem to be normalising. Even as per a study commissioned by the Economic Advisory Council of the Prime Minister, people earning Rs 25,000 per month fall in the top 10% of wage earners in India! At a time when reportedly 23 crore Indians slipped into poverty, the combined wealth of Indian billionaires more than doubled during the pandemic, and their numbers leaped up by 39% to 142. So much so that there has been a demand for a wealth tax on the super rich from several sections aimed at ensuring higher social spending that can for real build the resilience of the people and lift the economy from below.

Finally, as suggested by prominent economists, the government needs to stop its obsession over supply-side issues, and instead concentrate on bolstering demand. It has so far been able to use its divisive agenda and hate-mongering to tide over its gross failures in the economic front, but if the protests by Railways job aspirants or the raging fires against the Agniveer scheme are any signs, anger seethes under the surface.

Anirban Bhattacharya is a researcher at the Centre for Financial Accountability, New Delhi.

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