Inflation and the Right Policy Response for India

Sep 7, RBI governor D. Subbarao:
“We believe that inflation is becoming a concern sooner than we’d expected earlier and we have to balance the need for growth and price stability,” Subbarao said in an interview. “Inflation is a more urgent concern than in the other parts of the world. We know that there is risk to premature withdrawal or exit from the expansionary policy and there is a risk to delaying it too much... Our current monetary and fiscal stance is not the steady state. We have to unwind.”

Sep 15, RBI governor D. Subbarao:
“The question of exit will be asked much sooner than (in) other countries. We have to take a call on supporting the recovery and stemming inflationary pressure,”
“We will not exit until we are sure that recovery is secure,”

Sep 19, Finance Minister Pranab Mukherjee:
"To prevent the adverse impact of the rising prices of essential commodities, we are encouraging imports where there is short supply,"
"These measures we are taking, but at this point of time, I cannot accept the dear money policy or credit curbing because that will have an adverse impact on overall growth."

I think that the FM is on the right track. One shouldn't conflate two different phenomena -- a rise in the aggregate price level and a rise in the price of some category (no matter how important). Food and fuel prices are volatile, which is why other central banks use a core inflation measure. But food price inflation in India really hurts the poor, so it is a political hot potato. Increasing food availability is the right short term response.

There is also scope for reforming the agricultural sector to allow freer flows of food items within the country, better management of government stocks, and development of better measures of inflation for guiding monetary policy. The growth concern also matters for climbing out of the fiscal policy hole -- growth is how India did it earlier this decade.