Topic – Indian Economy and issues relating to growth
5) The policy of inflation targeting in India, which RBI has persisted with for quite some time now is the reason why capital intensive industries in India are suffering. Critically analyze. (250 words)
Why this question
The article talks about the persistent policy of inflation targeting, which the author alleges has been at the altar of growth. The article examines the problems being faced by the capital intensive sector in the country and associates the causes of the woes to the policy of inflation targeting. This is a very important conceptual article which will compel you to revisit the basic concepts of macroeconomics.
Key demand of the question
The key issue that needs deeper analysis in this question is whether focussing merely on inflation has stymied growth particularly in capital intensive sectors of the economy which has led to creation of bad loans. In your answer, you must explain the capital intensive sector is under stress. Next, we need to mention the pros and cons of strict inflation targeting done by RBI and whether that has impacted growth. Post this, we need to explain what are the comprehensive n set of factors that has caused this situation, and end with a way forward.
Critically analyse – When asked to analyze, you have to examine methodically the structure or nature of the topic by separating it into component parts and present them as a whole in a summary. You need to conclude with a fair judgement, after analyzing the nature of each component part and interrelationship between them.
Structure of the answer
Introduction – Start with explaining the gravity of the situation by cutting facts and figures (as done in the article) regarding the magnitude of problem in sectors such as power etc.
- Give a brief account of the policy of inflation targeting adopted by the RBI which kept interest rates high in India over the years.
- Explain why focussing merely on inflation might have stymied the growth of economy. Highlight that the target adopted by India have been largely based on European experiences. Explain the central argument made by author that some inflation has to accompany industrialisation because it requires the diversion of a part of the income of the economy from producing consumer goods to capital goods. Give example of south East Asian countries.
- Next, highlight how focussing on inflation has had several socio economic benefits for the country, apart from his obvious political utility.
- Post that, explain the comprehensive set of factors that have caused the issues in capital intensive sector of the economy. Here , Raghuram Rajan’s report to the standing committee would be quite helpful.
Conclusion – Give your view on the policy of inflation targeting followed by RBI and discuss way forward.