In recent interactions, the Reserve Bank of India has displayed a penchant for songs and literature.

At its last Monetary Policy meeting early in February, the Central Bank announced a status quo on interest rates, saying the focus remained on growth. Inflation, which has now been sticky for two years, does not present a problem, it said.

Speaking to the media shortly after the announcement, Reserve Bank Governor Shaktikanta Das paid a tribute to the nation’s most famous playback singer: “As the great Lata Mangeshkar – whom we lost recently – sang in her immortal voice, ‘Aaj phir jeene ki tamanna hai’ [Today I have the desire to live again]. Together with the spirit behind the next line of this beautiful song, she has conveyed an eternal message of optimism.”

His declaration brought to mind a quote by Theodore Roosevelt: “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” Given the extraordinary tightrope the Reserve Bank now finds itself walking, one wonders which of the three it will choose.

Even before economic forecasts were turned turtle by the Russian invasion of Ukraine, it was clear that 2022 was going to bring new and very serious challenges to India’s financial health.

As basic economics textbooks explain, there is generally a inverse relationship between the interest rates that are set by a country’s central bank: when rates are low, an economy tends to grows – but inflation increases. However, if rates are raised, inflation slows but so does economic growth.

Growth and inequality

India’s GDP is now estimated to grow at 8.9% in the current financial year. That is lower than the National Statistical Office’s earlier estimate of 9.2%, which did not reflect the loss in the January-March fourth quarter due to the third Covid-19 wave. Growth in the third quarter from October-December was projected to be 5.4%.

Visibly, there is a slump in the construction sector, which has contracted 2.8%. The manufacturing sector barely moved the needle with 0.2% growth.

Dharmakirti Joshi, chief economist at Crisil Research, said that the National Statistical Office data shows that while consumption is now above the pre-pandemic levels, on the supply side, contact-based services seem to have been hit harder than estimated previously.

Aditi Nayar, chief economist at ICRA, believes it is not all gloomy. She says the 7% expansion in private consumption coupled with the mild rise in current consumer confidence in January 2022 despite the onset of the third Covid-19 wave bodes well for demand and capacity utilisation outlook.

The Reserve Bank of course has been clear in its communication over the last few months that its focus remained on getting growth back on its feet. But growth itself seems a fluid number.

On January 31, estimates from the office of the Chief Economic Adviser pointed to 8%-8.5% real growth. A day later, Finance Minister Nirmala Sitharaman in her Budget speech said she expected India’s nominal GDP to grow by 11.1% – real GDP growth then being estimated at 6.6%. Nine days after that pronouncement, the Reserve Bank presented its last bi-monthly monetary policy saying India’s real GDP would grow by 7.8% during 2022-’23.

Three targets, three outcomes. Which one shall we go with ?

Two crucial points need to be underlined here, while having a “growth-leaning RBI” conversation.

One, it is clear that economists, policy makers and governments will have to go back to the drawing table to reassess growth outcomes. S&P Global projected global growth to slow to 4.2% in 2022. Just as the 2021 rebound was broad based they said, most regions will experience a deceleration in 2022. The year 2022 was not chalked out to be 2021, but now it is much worse.

Two, what has been odd is the complete lack of comment or reference by the Reserve Bank to the deeply inequitous form and shape of India’s economic recovery so far. The now hotly debated Oxfam report, Inequality Kills, says that for India in 2021, the collective wealth of India’s 100 richest people hit a record high of Rs 57.3 lakh crore ($775 billion). In the same year, the share of the bottom 50% of the population in national wealth was a mere 6%.

It is clearly not a one size fits all recovery. Goods and Services Tax collections have continued to move at a brisk Rs 1.33 lakh crores for the month of February 2022 but so does the pain of the Micro, Small and Medium Enterprises sector. Madan Sabnavis, chief economist, Bank of Baroda, says the disappointment in the third quarter is in the low growth in manufacturing, even though corporations have established healthy growth in profit. It means, he says, that the unorganised sector has still not got up – the Small and Medium Enterprises.

Addressing inequality

What will the Reserve Bank’s choices be in the months ahead to address this inequity and what can it do to address economic inequality? Many former Reserve Bank governors have spoken about the issue, voicing their deep concerns.

Former Reserve Bank Governor Raghuram Rajan alluded to this deep economic divide in a recent interview where he spoke of the scarring to the middle class, the small and medium sector, and that India would be faced with weak consumption growth, especially for mass consumption goods.

During the turbulent years of the global financial crisis, D Subbarao was the Reserve Bank governor who was steering the ship. In April, he said that this time around, policy makers will have limited options: while worries about ballooning public debt would restrict fiscal support, concerns about inflation would keep the central bank from cutting interest rates. These limitations, he says, could contribute to making the economy’s recovery long drawn out.

Another Central Bank veteran C Rangarajan had warned after this year’s Budget speech that the fiscal consolidation plan seemed weak while the borrowing programme was high.

What then, will the Reserve Bank choose to do over the next few months to align divergent growth outcomes with a shaky fiscal backdrop ?

Dark clouds

In a recent interview RBI Deputy Governor Michael Patra said the perception that India has fallen behind the curve by retaining an accommodative monetary policy when other economies are either tightening monetary policy or announcing normalisation is unfair. The Reserve Bank was reading the data and its assessment was that inflation momentum is actually declining. So, India, he said, is in a comfortable position as far as inflation is concerned.

Not everyone seems to share that optimism. Nomura says inflation has been high for two years already, despite slack in the economy. India’s inflation rate since the pandemic began (January 2020 to January 2022) has averaged 5.9%, up from 4% before the pandemic (2016-2019).

Other emerging market Asian economies that have also undergone both pandemic disruptions and scarring effects have not experienced such a sharp rise in inflation: Indonesia (1.8% post-pandemic versus 3.3% pre-pandemic), Thailand (0.3% versus 0.7%) and the Philippines only marginally higher (3.2% versus 2.9%).

Nomura believes inflation expectations are drifting higher and are unlikely to settle back at the 4% midpoint in the medium term. A continued high tolerance of inflation risks, it says, is hurting policy credibility. The assumption that inflation will stay below 6% may be tested, as current high oil prices spill over further into expectations, which could lead to even higher inflation, despite suboptimal growth.

Fuel prices

What are the different ways inflation will now begin to course like mercury through the economy’s veins, hurting households?

Retail prices for petrol/diesel/LPG have been frozen since November 2021 thanks to elections in five states. The last time India had a fuel price increase, crude was at $75 to a barrel. Adjusting for global prices would mean raising petrol and diesel prices by at least 10% – and an increase of more than r 30% for LPG. A 10% rise in crude oil prices generally leads to a rise in headline inflation of 0.3 percentage points-0.4 percentage points.

The last time crude was at $100 a barrel, it was Raghuram Rajan who headed the Reserve Bank of India. As prices began to cool off, he had appealed to the Government to swiftly take advantage of the situation and deregulate diesel. That decision still hangs by fire.

Consumer goods companies will need to start raising prices – Hindustan Unilever has already raised prices for the second time in a month. In this second round, increases have been in the range of 1%-9%. With other commodities like aluminium also kissing new highs, home appliances, vehicles, a lot else is headed to becoming more expensive.

Dairy major Amul announced its decision to increase milk prices by Rs 2 per litre. The services sector, which is still reeling from the impact of Covid and multiple shutdowns, may also be left with no choice but to start raising prices across for amenities rendered.

Not that India is alone in this battle against inflation. In its outlook for 2022, S&P Global warns that shipping bottlenecks and critical supply shortages will keep global price inflation high through 2022. Crude oil prices throw a spanner in the works of course and could keep inflation substantially higher for longer. In response, several central banks have moved to increase interest rates, the US’s Federal Reserve primary amongst them.

The Bank of England has been announcing back-to-back increases. The Bank of Canada is set to move this as is the European Central Bank. All of this suggests the biggest tightening of monetary policy since the 1990s – ostensibly to ensure a soft landing for economies, as opposed to a hard crash.

Even for those banks that have moved on rates, some economists believe it is simply not enough and after a point may even be out of the grip of central banks. “In terms of the economy, a global stagflationary recession is now highly likely,” wrote economist Nouriel Roubini. “Analysts are already asking themselves if the Fed and other major central banks can achieve a soft landing from this crisis and its fallout. Don’t count on it. The war in Ukraine will trigger a massive negative supply shock in a global economy that is still reeling from Covid-19 and a year-long build-up of inflationary pressures. The shock will reduce growth and further increase inflation at a time when inflation expectations are already becoming unanchored.”

With that backdrop, the sanguine nature of the Reserve bank of India jars. Of course, it is entitled and qualified to take a decision around when to increase rates. To be fair, the Reserve Bank has done an admirable job of managing currency fluctuations and a very large government borrowing programme through the Covid pandemic.

But 2022, in its early days is already promising to be something quite else. Most importantly, the fragmented nature of India’s economic situation makes one wonder how debilitating high prices will be for homes and families that are already struggling.

Political upheavals across Europe have displayed the pressing need for leaders with equanimity, resolve and vision. The same goes for our economic institutions. But if heroes can have clay feet, institutions can also be on shifty sand. It is incumbent on India’s central bank to do the right thing and to do the fair thing. Time is running out.

Mitali Mukherjee is a journalist, TEDx speaker and Chevening Fellow who lives in Delhi.