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Business News/ Opinion / Columns/  A Burmese shadow over India’s monetary policy update

A Burmese shadow over India’s monetary policy update

RBI’s success with inflation control will also depend on how the Centre manages its food imports

Photo: MintPremium
Photo: Mint

Here’s a quiz question: What does India’s refusal to unequivocally criticize Myanmar’s military rule have to do with the Reserve Bank of India’s (RBI) monetary policy? A bit perhaps. The road to meaningful monetary policy outcomes in India is occasionally paved with geopolitical decisions, with the circle of influence sometimes including improbable candidates like Myanmar. RBI’s first monetary policy for 2021-22, presented on 7 April, has an understated flavour: its putative success will depend on how the external affairs ministry plays its hand.

The central bank’s April monetary policy has projected a 10.5% gross domestic product (GDP) growth rate and a 5.1% inflation rate for 2021-22. But given the unusual economic conditions and multiple risks that loom on the horizon, these projections are vulnerable to many external forces. RBI has moderated its standard policy ebullience by stating that while all the ingredients are present for a robust economic recovery, myriad dark clouds could still stop play.

RBI has added various levers and fulcrums to this policy, which are focused on mitigating risks when they present themselves. Apart from committing to inject a predictable quantum of liquidity into the system through buybacks of government bonds in the first quarter of 2021-22 (which helped soften bond market yields on 9 April), the monetary policy committee also gave an assurance that it will continue with the current accommodative policy stance “as long as necessary", without providing an end date as in the past. A note from Axis Bank chief economist Saugata Bhattacharya says: “…the operating mechanisms have tried to strike a fine balance between a degree of predictability in forward guidance and retaining discretion for RBI to responding to evolving conditions."

The central bank’s wariness stems from the likelihood of higher supply-side inflation, on the back of an uncertain demand revival following a resurgence in covid infections. It is here that RBI makes a direct appeal to the Centre and states, requesting them to undertake “concerted and coordinated" action in reducing petrol and diesel prices, through lower taxes and retail margins. RBI’s matrix of probable risks comprises rising global crude oil and other commodity prices, including prolonged supply chain disruptions.

Oil plays a critical role in RBI’s inflation control plans—core inflation (retail inflation minus food and fuel inflation) was 6% during February, reflecting the pass-through of higher crude oil and other commodity prices to retail prices. Oil therefore might force RBI governor Shaktikanta Das to look to external affairs minister S Jaishankar for help. This assumes greater significance after India and Saudi Arabia recently engaged in a war of words. Oil minister Dharmendra Pradhan had requested OPEC-plus (OPEC nations and its allies, such as Russia) to ease supply curbs by pumping more oil from the ground. The Saudi oil minister’s retort, that India should use up its strategic oil reserves first, has reportedly offended the Indian establishment; it has even compelled the government to seriously explore reducing dependence on West Asian oil. This will undoubtedly require Jaishankar’s team in the foreign ministry to work the diplomatic channels.

There is another item—pulses—that could ignite inflationary tendencies and, strangely, Myanmar can lend a helping hand here. The April monetary policy report states: “Persistent structural demand supply imbalances in key food items such as pulses, edible oils and fats, and eggs, meat and fish could also keep inflation elevated." In two key items—pulses and edible oils—India’s consumption surpasses its production, forcing it to rely on imports every year. Pulses are a vital protein source and rising prices have an adverse effect on consumption and nutritional health.

Inflation in pulses was in double digits throughout the past 12 months, despite the government improving supplies by releasing buffer stocks, easing import restrictions, reducing import duties on certain pulses (masur), among other measures. The monetary policy report says this helped reduce the inflation rate in pulses from 18.3% in October 2020 to 12.5% in February 2021. But it’s still in double digits.

So, where does Myanmar fit in? It happens to be India’s second largest supplier of pulses, after Canada. Myanmar supplies almost 24% of India’s total pulse imports, with Canada providing 34%. India’s acreage under pulses during 2020-21 was below its target, thereby increasing import dependence. India’s diplomatic exertions in refusing to outright censure the military coup may be seen as pragmatic geopolitics, given that we share a 1,600-km border with Myanmar. Plus, there is always a China factor. But is it only geopolitics? Look at it differently. Canada’s statements on the farmer agitation raised hackles in India. Yet, when it asked for vaccines, we promptly exported 0.5 million doses to Canada. And Myanmar? We exported 3.7 million doses to it, ranking it among the top seven vaccine recipients.

Various commentators have downplayed the role of trade in India’s ambivalent attitude towards the military regime in Myanmar. While trade might indeed seem insignificant, when compared with the Great Game, it is the nature of trade—or its components—that makes it critical. Pulses-for-equivocation could well become the new carry trade, as well as an anti-inflation tool for RBI.

Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.

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Published: 11 Apr 2021, 10:50 PM IST
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