Government should stick with its flexible inflation targeting framework, which has worked well, to reap the benefits over the long term, former Reserve Bank of India (RBI) deputy governor Viral Acharya said.
The central bank and the government agreed in 2015 on a policy framework that stipulated a primary objective of ensuring price stability while keeping in mind the objective of growth. That framework is due for a review in early 2021.
“Evidence seems to suggest this is a good disciplining framework with good democratic accountability. We should persevere with it,” said Mr Acharya.
He said the benefits, such as lower borrowing costs, will only be seen over time.
“I would not enter into policy adventurism by changing this right now. It’s too risky,” Mr Acharya told Reuters in an interview late on Wednesday.
The RBI has by and large been successful in keeping inflation within the mandated 2 per cent-6 per cent range. But the flexible inflation targeting policy has faced criticism recently on account of the high weighting given to food items in the inflation basket which have proven highly volatile.
CPI inflation on average has stayed above the RBI’s mandated range in recent months due to supply-side disruptions on account of a nationwide lockdown to contain the coronavirus pandemic.
And despite having spent less in relative terms than other emerging markets on direct fiscal stimulus to counter the pandemic-driven downturn, India faces a bulging fiscal deficit and a steep rise in its debt-to-GDP ratio.
India’s GDP contracted 23.9 per cent in the June quarter and is seen contracting by around 10 per cent for the year as a whole.
Some economists have said the inflation targeting framework has had an adverse impact on growth due to its narrow focus on inflation compared with the multiple-indicator approach the RBI previously used, which looked at both growth and price stability.
“A case can be made that India has been a precocious inflation targeter,” V. Anantha Nageshwaran, a member of the Prime Minister’s Economic Advisory Council wrote in an opinion piece for the Mint newspaper in August.
“The country may have sacrificed financial stability and economic growth in the process. So India may need to re-examine the appropriateness of the IT (inflation targeting) framework for its development needs,” said Mr Nageshwaran.
But Mr Acharya suggested India has bigger problems to concentrate on first.
“People say that we are not factoring in financial stability, and I disagree because financial stability involves external sector stability,” Mr Acharya said.
“We have our fiscal house to fix, we have the financial sector to fix and the real economy to fix. So for the entire system to get so passionately energised about revising something that ain’t broke – it beats me”.