Trade measures can ease food inflation only in short run, says MPC's Shashanka Bhide

Shashanka Bhide is one of the three external members on the Reserve Bank of India’s Monetary Policy Committee.

Trade-related measures to improve domestic supply can help cool down food inflation only in the short run, Shashanka Bhide, one of the three external members on the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC), has said.

"The challenge of addressing more frequent supply shocks is clear. While trade measures may help address the supply shocks in the short-term, longer-term measures on the supply side including production and logistics would be more crucial," Bhide told Moneycontrol following the release of the minutes of the October 4-6 meeting of the MPC on October 20.

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Over the last couple of years, the Indian government has had to restrict the export of a number of food items – such as wheat, rice, and onion – in addition to other supply-side steps to help lower domestic food inflation, which had surged to a 42-month high of 11.51 percent in July. While food inflation, along with the headline retail inflation rate, has eased appreciably since then, uncertainties remain and the government continues to intervene on the supply side, with the latest step being an extension of the restrictions on export of sugar beyond this month.

"For us, the availability of food and energy at affordable prices is crucial and government interventions are needed. Monetary policy measures alone would not be adequate to moderate the price spikes induced by supply disruptions," Bhide noted, adding that the long-term solution was to make India's supply chain address output fluctuations more efficiently.

Bhide, however, expects "beneficial trade" to make a comeback as geopolitical tensions ease.

Path to 4 percent

Although Consumer Price Index (CPI) inflation fell to a three-month low of 5.02 percent in September, it has now been above the medium-term target of four percent for four years. According to Bhide, the fall in inflation is not just an indication of the July-August spike being temporary but also the effectiveness of the government's supply-side interventions. Further, it is also suggestive of inflationary pressures "moderating in general".

"Sustaining this trend is the policy challenge now," Bhide said.

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"However, in the short-term, we still have concerns on food inflation and the global energy price volatility. The impact of uneven spread of rainfall remains a concern," the Honorary Senior Advisor for the Delhi-based National Council of Applied Economic Research added.

Commenting on the last four years of four percent-plus inflation, Bhide said the positive aspect of the experience has been the return to stability – admittedly, not fully – from the impact of several shocks.

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"In many countries, there is a decline in inflation rate, but well above the targets. I believe that the present stance of the monetary policy, focusing on achieving the inflation target of 4 percent in a durable way is appropriate. Decline of inflation rate to 5.2 percent in April-June 2024 needs to be sustained," he added.

Growth optimism

Like the RBI – which sees India clocking a GDP growth rate of 6.5 percent in both 2023-24 and 2024-25, Bhide expects the growth momentum to continue next year as well, with lower domestic inflation and improvement in global trade volume growth helping the cause.

However, in the long-run, the economy is faced with both, opportunities and challenges. While there is promise in the form of transition to new technologies, the demography, and investments in social and economic infrastructure, it will be a challenge to improve inclusive development and reduce the cost of growth. This will need the assistance of a stable global environment.

"We have seen growth of six percent or more for sustained periods now, which is a significant achievement. It is realistic to expect improvement in our recent growth experience over a long term."