CEA: No inflation targeting framework is sacrosanct
The Economic Survey for 2023-24 questioned the merits of India’s inflation targeting regime, which aims at a headline inflation rate of 4% with a band of 2% on either side. It mused aloud whether a regime that targets inflation, excluding food prices, would be more appropriate in the Indian context, especially given the unintended effect it has on farmers’ terms of trade. Some have opined that it is a settled issue and there is no point in opening it up.
That is a strange and unfortunate argument. Nothing is settled in science, more so in social sciences. The relevance of theories, practices and policies is always subject to re-examination in the light of new empirical evidence and changing contexts.
Not so long ago, the case for free trade was considered settled, as was the case against industrial policy and fiscal laxity. Several apostle-countries of these policy doctrines have quickly abandoned them to the point of pretending now that they never held them sacrosanct. Trade actions have soared.
Industrial policy is now de rigueur, and a sustained fiscal deficit exceeding 6% of GDP is met with shrugs in policy circles. Whether these changes are for the better or not is not the issue. But, as contexts change, policy shifts take place.
That is par for the course. Else, there will be intellectual fossilization and ‘fossil’ is a bad word these days. Mercifully, in India, the question posed by the Economic Survey has sparked a lively discussion, and it is a good thing.
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