Has India taken another small step towards inflation targeting as monetary policy framework? On Friday, finance minister P. Chidambaram said the inflation target should be set by Parliament and the central bank should take the steps necessary to achieve it.
A target is no doubt welcome. The issue is, should Parliament set it?
In India, governments of a populist persuasion will try and persuade Parliament to set the target on the higher side. This will give them flexibility to spend money to meet political objectives. The danger then will be that there will be an inbuilt tendency for inflation to edge up and the central bank may end up being constricted by law not to step in.
The debate should not be about inflation targeting per se, but about the conflicts of interest in allowing political authorities to set the target.