Rising Prices and Falling Credibility of Policy

Shankkar Aiyar
5 min readFeb 19


The January CPI print defied RBI’s optimistic outlook. It underlines the debate on prices of essentials at bazaars and in homes. For sure the data will be tortured in coming weeks to derive reasons. But beyond the explorations for explanations what is material is how this impacts borrowing, investment and growth.

By Shankkar Aiyar | Published: 19th February 2023 12:23 AM |

Inflation, Ronald Reagan said, is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman. John Maynard Keynes observed that continuing inflation impoverishes many and enriches some, as it arbitrarily rearranges wealth. Households in India and across the world are experiencing the Reaganesque definition and pondering over the Keynesian observation.

The New Indian Express | File Photo | Image for representation only

The falling credibility of policy prescriptions is reflected eloquently in data. On February 8, Reserve Bank of India Governor Shaktikanta Das and the Monetary Policy Committee averred that “headline inflation had moderated” (and trimmed the inflation forecast for Q4).

Six days later, on February 14, NSO informed India that consumer price inflation (CPI ) shot up to 6.5 per cent from 5.7 per cent, a three-month high, in January 2023. Effectively retail inflation in India has been above the tolerance level of 6 per cent in nine of 11 months.

While it is true that the policy statement did underline the concern about the stickiness of core inflation, the googly in the data for the RBI was the rise in headline inflation. What is significant is the composition of elements which propelled the rise in levels — the rise in Consumer Food Price Index to 5.94 per cent from 4.19 per cent and that of retail prices in the rural economy. Doubtless, this will fuel the political response to the economic question as political parties woo voters in the elections in nine states.

The debate in bazaars and homes across India is about the rising prices of essentials. Milk prices have gone up about 15 per cent in six months, price of eggs have increased almost 20 per cent thanks to the Malaysia effect and that of meat and fish too have spiralled — the late Subir Gokarn had memorably characterized the phenomenon as “protein inflation”.

Barring vegetables — thanks to seasonality — prices of every item in the food basket shot up. What should ring alarm bells on Mint Street and Raisina Hill is the rise in the price of cereals — a weather event like last year before the Rabi harvest could deal a body blow to assumptions.

For sure the data on inflation will be tortured over the next few weeks in the RBI and in the Ministry of Finance to derive explanations — about the effects of procurement of grains and of auctions, about the absence of adjustment for subsidies and more. The old chestnut, the argument for shifting fuel taxation to GST to bring down fuel price inflation, is bound to make an appearance. There will also be much lather laced with jargon about the “long and variable lag” for policy to take effect — simply translated, why despite a series of rate hikes inflation continues to surprise on the upside.

What is relevant beyond the exploration for explanations is the divergence between reality and assumptions of inflation underlying policy prognosis and prescription. It is material how the variance in these impact estimates in the balance sheet of the government — for consumption, investment and GDP growth forecast, particularly as India heads into the 2024 elections. Inflation is essentially about the quantity of money chasing output.

The elephant in the room is the quantum of government expenditure fueled by borrowings. It is estimated that the general government– the centre plus the states — will borrow around Rs 23.5 lakh crore this year or roughly Rs 6400 crore a day. The cost of borrowings is bound to rise as the RBI pushes further rate hikes to contain inflation — and will inform and influence the ability of governments to borrow.

The cost of capital is influenced by domestic factors and increasingly in the post-pandemic world by global conditions. The surprise rise in inflation in the United States has triggered expectations of a further 50 basis points hike. The rising cost of capital impacts growth — and will influence portfolio flows and trade. Given India’s delicate current account situation, it is likely RBI will respond in order to maintain the interest differential and to protect its currency.

Rate hikes are a blunt instrument focused on demand destruction. Despite varying conditions — for instance in the labour markets in developed and developing economies — the entrenched consensus is in favour of rate hikes. Indeed the impact of rate hikes by G7 nations on the debt and growth of emerging economies is on the agenda of Finance Ministers at the G20 meeting this week in Bengaluru.

The outcome of that debate will most likely follow the train of “long and variable lags” narrative. That said, there is no disputing that inflation will be impacted by the cost of imports and the “higher for longer” thesis prevailing in the world.

India remains the fastest-growing large economy. However in order to preserve its position it would need to crowd in private investment, create incomes and propel growth. This is challenged by the spectre of inflation, level of general government deficit and cost of money.

The circumstance calls for refocusing attention on policies — for instance, asset monetization and disinvestment — to harness resources and leverage the demographic advantage. India can scarcely afford daily political distractions which detain action and popular aspirations.

Shankkar Aiyar, political economy analyst, is author of ‘Accidental India’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’ and ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’.

You can email him at shankkar.aiyar@gmail.com and follow him on Twitter @ShankkarAiyar. His previous columns can be found here. This column was first published here.



Shankkar Aiyar

Journalist-Analyst. Author of ‘Accidental India, ‘Áadhaar: A Biometric History’ and ‘The Gated Republic’. Studying how politics rules the economics of people!