RBI's losing battle against inflation as prices and money supply shoot up

The Union government may disagree but it is not in control of either the economy or the nation’s health. The economy risks repeating the spectre of 2020, when it contracted by anything between 7.7 percent and 9.6 percent. The country lost GDP worth well over Rs.10 trillion. The monthly per capita income level dropped to around Rs.10,000 from Rs. 11,254 in 2019-20.

Poor transportation facility further adds to the problem. The government does not seem to have any clue about how to handle the situation. At the same time, the overall money supply with the public recorded a double digit increase. A select group of businessmen is minting money out of the situation. The inflation rate — both wholesale and retail — is on a fast forward mode. Prices are soaring almost every month.

The Reserve Bank of India, the country’s central bank, is doing little to control inflation, one of its key functions. On the contrary, it has been playing to the tune of the government. Banks are under pressure to advance to MSMEs irrespective of the current poor business environment and their ability to repay loans. Public sector banks have already approached RBI to open a loan restructuring window. Banks need to raise capital to extend more credit to individuals and businesses as Covid relief measures. At this rate, more public sector banks may turn sick and more borrowers may go bankrupt.

This year, state-level lockdowns have substantially reduced demand for loans from generally healthy companies and institutions. Earlier, banks were concerned about the survival of small borrowers and businesses. Now, they are worried about falling credit demand from big clients, which have started facing sales drop and liquidity crunch as economic activities across the country, especially in non-essentials, have been significantly hit over the last 15 months. RBI seems to be less concerned about these aspects and wants banks to offer more support to small units and borrowers in keeping with the government directive.

The central bank is trying to maintain a brave face saying the economy during the first quarter of this financial year is not as much in distress as it was in the corresponding period, last year. RBI said real economic indicators had moderated in April-May, 2021. “The biggest toll of the second wave is in terms of a demand shock — loss of mobility, discretionary spending and employment, besides inventory accumulation, while aggregate supply is less impacted,” it stated.

Interestingly, the State Bank of India has warned that the increased healthcare spend on account of the pandemic, rising fuel prices and online delivery of articles are crowding out consumer spending. SBI’s chief economist Soumya Kanti Ghosh said health expenditure, which currently constitutes five percent of the overall inflation basket, may shoot up beyond 11 percent due to the pandemic. Rising fuel prices, including LPG, are also adversely impacting on consumer spending. Ghosh pointed out that the share of non-discretionary expenditure has risen to 59 percent in April from 52 percent in March. And, this is not good for the economy.

Despite the pandemic, the Union government’s health budget remains a pittance, around 0.50 percent of the GDP. In 2017, the government’s national health policy recommended an annual health spend of three percent of GDP. Covid has nakedly exposed the result of the government’s poor attention on public health over the years. Unfortunately, the nation’s current ranking of 145 out of 180 countries in terms of healthcare indicators such as share of OoPE, equitable and good quality access to healthcare, availability of infrastructure and human resources has little impact on the government’s policy and action.

With the economy already struggling hard to recover, the continuous increase in prices of most commodities, including petroleum products, scheduled drugs and those for routine home consumption such as vegetables, fish and meat, has added to the common man’s pain.

In fact, during this month alone, the prices of perishable farm products have gone up by 20 to 100 percent compared to those a month ago. Overall, the wholesale price inflation climbed to a record 11-year high of 10.5 percent in April as prices of fuel, manufactured products, minerals and several food items shot up. Prices of manufactured products rose nine percent, last month. While buyers in the market are down, the supplies seem to have dropped even further to make products dearer. This is a peculiar situation.

Once again, unemployment has sharply raised its head. This is more so with contract workers, including white-collar employees, daily wage earners and those engaged in unregulated jobs.

The latest report by the Centre for Monitoring Indian Economy (CMIE) published last week showed how unemployment in the country’s rural areas, towns and cities went up sharply from 6.82 percent on April 28, 2021, to 14.45 percent on May 16. This is the highest growth in the last 50 weeks. According to CMIE, lockdowns and restrictions in various states are mainly responsible for the rise in unemployment this year.

Sadly, the government has practically no plan to arrest the deteriorating economic trend. With an extremely low budget for health spend, the government does not seem to be quite capable of reducing the people’s pain and fear in the wake of the fresh wave of Covid-19 in the last three months. The government hopes the crisis will blow over by the second half (October-March) of the fiscal and the economic situation will automatically improve.

(IPA Service)

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