Day 15 – Q. 3 What do you understand by inflation targeting? Has the adoption of an inflation targeting regime served the interests of the Indian economy well? Critically examine. 

What do you understand by inflation targeting? Has the adoption of an inflation targeting regime served the interests of the Indian economy well? Critically examine. 

मुद्रास्फीति लक्ष्यीकरण से आप क्या समझते हैं? क्या मुद्रास्फीति लक्ष्यीकरण व्यवस्था को अपनाने से भारतीय अर्थव्यवस्था के हितों की पूर्ति हुई है? समालोचनात्मक जाँच कीजिए।

Approach-

In this question candidates need to write about how India  manage to done fairly well in terms of economic growth despite global economic slowdown .

Introduction –

The world economy was just about poised to recover from the ravages of the corona-virus pandemic but  Russian invasion of Ukraine in February put to an end all hopes of a global recovery. But India’s economy done fairly well in this turmoil.

Body –

The Organisation for Economic Cooperation and Development (OECD) in its latest report projected India as one of the few growing economies in Asia amid a global slowdown triggered by a massive energy shock owing to the ongoing Russia-Ukraine conflict.

• The Paris-based intergovernmental body that focuses on economic policy reports said that India is set to be the second-fastest growing economy in the G20 in FY 2022-23 after Saudi Arabia.
• The statement comes despite decelerating global demand and the tightening of monetary policy to manage inflationary pressures.
• Most economists estimate that India will grow at around 6% during 2022-23.

Reasons why Indian economy is robust in economic slowdown of world-

• The India’s “impressive progress” in recent years in extending access to financial services to a larger portion of the population, including disadvantaged socio-economic groups by leveraging the country’s “competitive strength in ICT, the Unified Payments Interface (UPI) and other tools”, which are easing the transition towards a cashless economy.
• The sectoral composition of the Indian economy has helped in reducing the impact of global supply-chain disruptions.
• Banks credit to industry is showing signs of sustained uptick .data on sectoral deployment of bank credit growth too industry accelerated to 8.7 percent in may 2022.
• Credit to MSME industries has shown strong growth driven by the governments emergency credit line guarantee scheme .
• With increase in capacity utilization pick up in infrastructure spending and financing of PLI schemes ,there seem to be appetite for borrowing from corporate.
• The services sector dominates the Indian economy by far, contributing over 50% of gross value added, while the manufacturing sector contributes less than 20%.
• Since disruptions of the global supply chain affect the manufacturing sector significantly more than they affect other sectors, the overall impact on the economy has been lower.
• India is particularly vulnerable to oil shocks, since it imports over three-fourths of its energy requirements. Luckily, India has been able to strike a deal with Russia and has started importing large quantities of oil from Russia at reasonable prices.
• In this case, Western sanctions on Russia have actually helped India since Russia was hard pressed to find large customers other than China. At any rate, oil imports from Russia now account for a fifth of overall Indian oil imports.
• There may be attempts from Western countries to place restrictions on these imports since a price cap has been imposed on Russian oil as part of the overall sanctions. So far, India has resisted all such attempts.

Way forward-

• There still remain considerable margins to improve efficiency, accountability, and transparency of public spending, devoting more resources to health and education and building fiscal space to enhance resilience,
• Risks remain significant. In these difficult and uncertain times, the policy has once again a crucial role to play: further tightening of monetary policy is essential to fight inflation, and fiscal policy support should become more targeted and temporary.
• Accelerating investment in the adoption and development of clean energy sources and technologies will be crucial to diversifying energy supplies and ensuring energy security.

Conclusion-

In times of global distress, partial decoupling of the Indian economy from the world economy is a blessing, since it ensures that the domestic economy is insulated from the world economy.But Renewed focus on structural policies is the need of the hour to allow policymakers to foster employment and productivity.