GS3 (Indian economy)
What is inflation targeting? What steps have been taken by government and RBI to achieve it?
Best answer
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Extreme high inflation or low inflation, both is detrimental to economy. Thus, maintaining general price in an acceptable range is major objective/economic policy for any government. This is called inflation targeting.
In India, CPI(Consumer Price Index) is used as a measure for inflation targeting.
Steps taken by government to containing inflation :
* Urjit Patel committee was constituted to study and suggest the range of inflation and mechanisms to implement them.
* RBI and the government signed the Monetary Policy Framework Agreement in February, 2015. The framework set to implement the Committee’s recommendation.
* As per the committee’s recommendation, an inflation target of 4% with a band of +/2% was set.
* The government also set up a 6 member Monitory Policy Committee(MPC) chaired by RBI governor. The committee upon consecutive failure for 3 quarters will have to report the reasons of its failure, thus making it accountable to public.
* Since food is major part of CPI, containing food inflation due to lean monsoon is essential. Thus, government has taken steps to create rural infrastructure like PMKSY, PMGSY, DDUGJY for feeder separation to ensure sufficient power to farmers, e-NAM portal and import of pulses.
* The state governments has also been asked to raid hoarding of food stocks and cartelisation .
* The GST constitutional amendment act is also bound to contain inflation in long run by subsuming multiple taxes which had cascading effect on prices.
Inflation targeting is should not be merely MPC’s sole responsibility. Governments both at central and state level must work in tandem to contain inflation in the set range. Setting a uniform tax in range of 15-17% by GST council, implementation of rural schemes by states can help inflation targeting achievable without relying on unpredictable rain.
