While the world has been focused on the Eurozone crisis, America’s economic growth slow-down, and China’s economic overheating risks, there’s an inflationary food crisis brewing for over one billion people.
India is now plagued by the kind of excessive inflation which would sound off the loudest of alarm bells elsewhere.
Despite growth in the services and manufacturing sector, the Indian economy is heavily reliant on the monsoon. Last year poor rainfall drove up food prices which quickly moved into other sectors as well. The country’s headline inflation rate, which was 10.6% in June, has been in the double-digits for five consecutive months
Double digit inflation is painful for consumers anywhere, but imagine how it affects the poorest, who devote a far larger proportion of their income to life’s necessities. The problem can be partially blamed on India’s economy, which remains extremely vulnerable to swings in activity due to the weather due to its dependence on agriculture and low levels of agricultural technology.
Yet there’s more to it:
Unlike central banks around the world, the RBI doesn’t have a clear inflation or unemployment mandate; instead it targets multiple indicators that are known only to officials within the bank. At any given point it is not clear whether the bank is monitoring inflation, exchange rates, financial stability or some other metric. This uncertainty has made guessing the RBI’s policy statements a favourite game amongst analysts.
Thus shoddy inflation management and an archaic economic structure means that bad weather alone could push Indian inflation over the edge:
The Indian economy has one of the highest inflation rates among emerging market economies and is in danger of overheating. To get inflation back under control there is a case for redefining the role of the bank to focus on primarily on price stability. But for now the RBI thinks that rake hikes and reports of a good rainfall are enough to reign in prices.
India isn’t as important to the global economy as China, but it’s still one of the key BRICs economies (Brazil, Russia, India, and China) driving global growth and its stability has ramifications that spread into geo-politics as well.