Can the Indian economy quickly grab the sustainable 7% real growth it desires?
Sunitha Natti By  Express News Service  The Indian economy, it appears, has trapped itself in an arithmetic 5-6-7 conundrum. The country longs for a 5% rise in retail inflation, but consumer prices are hotfooting creating unease. It also needs the Reserve Bank of India (RBI) to hold benchmark bond yields around 6% so that capital costs stay low, even though bondholders are grabbing their pitchforks demanding higher yields. Lastly, Asia's third-largest economy must leave its miserable 7.3% GDP contraction behind and quickly grab the sustainable 7% real growth, where incomes rise steadily and unemployment falls. The key at the moment lies with our monetary masters, aka RBI, as price and financial stability are central to economic stability. The latter is unthinkable before we conquer the other two. But with consumer and wholesale prices touching new peaks, critics warn about the perils of misreading the shadow and the substance. Evidence pointing to a build-up of inflationary pressures appeared certain last month, when prices shot up across the board and not just the jumpy food and fuel components. A non-scholarly view is that, regardless of the headline number, once prices rise, there's simply no going back. Moreover, the compounding effect of the initial price inflation ensures that the scarring on household budgets is indeed permanent. In essence, what experts term as 'transitory,' appears to be anything but temporary. But frankly, part of the disconnect between headline numbers and actual expenses is due to the outdated CPI basket measuring monthly prices. ALSO READ | Bank credit-to-GDP up, but India lags peers  So the dominant view across policy circles is that RBI's Monetary Policy Committee (MPC) may look through the latest inflation print as a one-off event owing to supply-side bottlenecks, rising global commodity prices and others. Because the current spike isn't due to excess demand, inflation should reliably return to 5% or thereabouts soon. The MPC too hopes the same. "Usually in such circumstances, especially if growth is weak, central banks look through the inflation in the understanding that once the price rise has been passed-through, inflation will come down. The other consideration is whether the temporary inflation can become more long term by raising inflationary expectation. Given the current circumstances, the MPC may look through inflation as there seems to be little evidence of overheating or rising inflationary expectations," noted Sabyasachi Kar, Professor, Institute of Economic Growth. For now, though all that RBI needs to do is keep a weather eye on inflation, the central bank's understrappers have their hands full overseeing liquidity operations and being the government's debt manager. Since the pandemic began, RBI has injected Rs 13.6 lakh crore as on March, and vowed to cut a blank cheque if necessary. As for debt management functions, with fresh bond issuances somewhat losing their purchase (just last week, 10-year bonds remained unsubscribed), the central bank is buying them with both hands. This trend is seen globally including in the US, whose central bank now owns over half of the post-pandemic bond issuances. In Japan, there are literally days when no trade happens and the central bank is the lone buyer and seller. Critics view this as going against the market spirit as bond prices and yields shouldn't be 'influenced' by central banks support. In some cases, they are accused of artificially keeping rates low to help governments interest payments remain bearable and for monetizing government debt by stealth. ALSO READ | Government open to more measures to boost economy: CEA  But not all agree. Seasoned central bankers view their actions as market stabilization moves. That's because, government bonds are an anchor in financial markets and given there's an 'awful' lot of collateral, any meltdown in the absence of buyers, even though bond issuers (here governments) aren't insolvent, will cause chaos. And everyone loses out in such situations. That's precisely what Andrew Bailey, Governor, Bank of England told parliamentarians recently. Here's Bailey: "That is not compromising the central bank's independence one bit. It is doing what any central bank needs to be do, which is carry out its duty both in respect of financial and monetary stability and stabilise markets. And as Milton Friedman once noted, during crises, financial stability takes centrestage in monetary policy, while inflation takes the second lead. Regardless of whether central banks have a single mandate (inflation) or dual (unemployment added) -- in reality, they all operate in duality as none can afford to ignore troubling unemployment or growth rates. That leaves us with our desired goal of 7% real growth. According to Kar, several factors are holding back India's medium-term growth rate. Some of these include basic factors like poor government-business relationship, rising bad loans, poor implementation of policies particularly at state level, while other factors are proximate determinants of growth such as interest rates or credit offtake. "If the basic factors are taken care of, the proximate factors become more important. If all of these are taken care of, there's no reason why India cannot have 6.5-7.5% growth in the medium-term," he concludes.