Finance Minister Nirmala Sitharaman on Thursday said inflation management cannot be “singularly” left to the monetary policy as a majority of activities are outside its purview in the current context.
Speaking at a seminar organised by economic think-tank Icrier, the finance minister said that both the fiscal policy and the monetary policy have to work together to contain inflation.
Consumer price index (CPI) based inflation or retail inflation is ruling above the Reserve Bank’s comfort level of 6 per cent since January. The central bank, which has been tasked by the government to keep inflation within 2-4 per cent range, has hiked the key policy rate by 140 basis points since May with an aim to check the rate of price rise.
Inflation management cannot be singularly left to monetary policy, which has proved totally ineffective in many countries, she said.
“The RBI will have to synchronise somewhat, maybe not as much synchronised as other western developed countries would do. I am not prescribing anything to the Reserve Bank…
“I am not giving any forward direction to the RBI but it is the truth that India’s solution to handling the economy, part of which is handling inflation also is an exercise where the fiscal policy, together with the monetary policy has to work,” she said.
The minister further said there are economies where policy is designed in such a way that the monetary policy and the interest rate management is the one and the only tool to handle inflation, she said.
“I would say India’s inflation management, the word ‘taming inflation’ or the word ‘keeping it within the tolerance limit’, is an exercise of so many different activities and a majority of which is outside the monetary policy in today’s circumstances,” Sitharaman said.
There could have been a time when people would have thought this is sacrilegious for the finance minister of a country to say so, she added.
As part of inflation management, she said, India increased the import of crude oil from Russia at discounted prices despite sanctions imposed on Moscow due to the Russia-Ukraine war.
In a couple of months, she said, India ramped up its import from Russia from about 2 per cent of the total shipment of petroleum products to 12-13 per cent as part of inflation management.
I give credit to the statesmanship of the Prime Minister to make sure that we did keep our relationship with all countries but yet manage to get the Russian crude…Sanctions, sanctions but countries (including Japan and Italy, among others) are finding their own way to get that Russian fuel (crude, gas). That also is a part of inflation management,” she said.
India is heavily dependent on oil-producing countries for meeting its energy needs. It imports 80-85 per cent of total energy requirements from abroad.
Stressing that the supply side is important for the management of the economy, the finance minister said there is a need to keep input prices of various sectors like MSMEs, agriculture and efficient logistics for produce to reach end consumers.
Gati Shakti programme of the government would help in making logistics efficient, increase cargo handling capacity and reduce the turnaround time for movement of goods, she said.
Last year, the government launched a Rs 100 lakh crore national master plan for multi-modal connectivity that aims to develop infrastructure to reduce logistic costs and boost the economy.
Sitharaman also said the way in which the government has managed inflation in recent years is a case to study and also a case for probably many emerging markets, which are also trying very many such things.
“Solution to handling inflation should be country specific although the problems which add to the problem of inflation are not country-specific, it comes across from various different parts of the globe, commodities, it can be because of so many different factors,” she said.
Noting that India would definitely do well for itself if its agriculture is very well managed, she said, there is potential for export for this sector with better infrastructure creation and improvement in productivity and remuneration for farmers.
Observing that inflation varies from state to state despite the GST, creation of one market and freeing movement of goods, Sitharaman said, a mechanism needs to be devised where both Centre and States work together on inflation management.
She added that despite the reduction in petroleum prices by the Centre twice, inflation in some states remained higher than the national average.
She said inflation is higher than the national level in those states which have not cut duties on fuel in line with the reduction effected by the central government.
“You might think I’m stating the obvious, but it establishes the fact that the movement of food grains and food-related items actually has a bearing on the price of such items, which again constitute a bulk of CPI (retail inflation)…We need to have a way in which we work together to handle inflationary matters.,” the minister said.