The Monetary Policy Committee of the RBI should neither raise policy rates nor wind up its accommodative policy stance. Yes, inflation has been on the rise, and growth has been setting in. This is the time to consolidate growth, not to be spooked by transient, supply-constrained inflation. Choking off supply-side price shocks is self-defeating. Higher prices will work demand and stimulate additional supplies, the price are allowed to work their way through the system, instead of being choked off through demand suppression. It is only second-order effects of price shocks in energy, logistics and labour that call for curtailment of demand via higher interest rates.
Far from there being any sign of excess demand, the latest available national income figures suggest squeezed consumption and constrained investment. GDP this fiscal would struggle to recover the size attained at the end of 2019-20. The policy response appropriate for inflation caused by excess demand would be wholly unsuited for inflation caused by supply disruptions and a spike in energy prices. The right way to combat elevated inflation right now is to reduce the burden of taxes at energy bears in India. Both the Centre and the states should share the tax cuts. They should take this action, even as they strive to find common ground on bringing energy under the goods and services tax. The government also has the cushion of relatively high import duties that can be pared, to lower prices. Stepping up production to increase supplies is another part of supply-constrained inflation.
Given below are two statements, one is labelled as Assertion A and the other is labelled as Reason R.
Assertion A : The policy response appropriate for inflation caused by excess demand would be wholly suited for inflation caused by a spike in energy prices.
Reason R : The right way to combat elevated inflation right now is to reduce the burden of taxes at energy bears in India.
In light of the above statements, choose the most appropriate answer from the options given below:
Correct Answer: (d) A is not correct but R is correct
Solution:The policy response appropriate for inflation caused by excess demand would be wholly unsuited for inflation caused by supply disruptions & a spike in energy prices. Hence, Statement I assertion is not true, II statement reason is true.
