When the NDA government took office, the Indian economy was facing a host of issues owing to the inefficiency of the previous government. The mishandling of the economy in terms of macroeconomic policy which resulted in spiked inflation, as well as fiscal and current account deficits had to be dealt with by the new government. A series of structural reforms were desperately needed. Today, the economy sits comfortably, having survived a wave of protectionism occuring globally and having sustained the highest growth rate in the world for a large economy.
India adopted an inflation target in March 2015, after a committee headed by the then deputy governor of RBI, Urjit Patel, recommended that the target retail inflation be used as the nominal anchor for monetary policy. After discussions between the government and the RBI, the target rate of inflation was fixed at 4 per cent with a tolerance band of a 2 per cent.
High growth rates are often associated with inflation. It is a paradoxical relationship wherein growth cannot be sustained under prolonged high inflation and also inflation is bound to be high with higher growth rates. In 2009-10, there was a fall in growth rate but inflation rates remained high, reaching 12.17 per cent in November, 2013. The goal for the NDA government was to manage a perfect balance where inflation rates stay low and growth rates still high.
In the last two months, monthly inflation rates have neared 2 per cent, they were at 2.33 per cent in November dropping further to 2.19 per cent in December. This was made possible despite growth rates higher than 7 per cent. It may be a cue for RBI to drop repo rates but this period of low retail inflation shall benefit consumers. In the latest projections, Food prices have taken the greatest hit, deflating by 2.51 per cent while headline inflation stood at 2.19 per cent.
Finance Minister, Arun Jaitley, had initiated macro stabilization and also brought in some major reforms like digitisation, Bankruptcy and Insolvency Acts, demonetisation and Goods and Services Tax which achieved greater tax compliance. Although, demonetisation and the GST jolted the economy for the short term, these reforms have stretched the economy’s growth potential. Inflation targeting is also being viewed as one of the most important reforms carried out by the government. “The inflation targeting regime has been one of the top reforms, almost as significant as the GST and the Bankruptcy Code,” Bhandari told BloombergQuint in an interview on the 1st of September.
Successful inflation targeting marks the beginning of the end of the rot that gripped the Indian economy in the UPA era, when growth was high but so was reckless bank lending and inflation which wandered up to double digits. The lack of structural reform and policy paralysis were the main reasons behind the problems which have now been addressed one after the other by Arun Jaitley. Prime Minister Narendra Modi’s tenure will be known for this feat, one that regimes in the last two decades could not perform with such dexterity.