Q. Critically analyse the reasons of existence of Structural Inflation in India.
A. Structure of answer:
– Define Structural Inflation
– Discuss Reasons
– Discuss their impact
– Way Ahead
Define: Structural Inflation is often used in context of developing economies like India, where the structure of the economy and various economic activities is such that there are supply side constraints to serve the demand. In these countries there are various underlying bottlenecks that lead to inflation. Such structural bottlenecks may be Infrastructural like lack of roads leading poor connectivity causing slow logistics in trade, Governance related like poor administration leading to inefficiency in governance, Agricultural bottlenecks like fragmentation of land, lack of irrigation, etc. Thus, here inflation is an outcome of structure of the economy. And is thus, sticky in nature or does not change easily with the use of conventional tools of monetary policy.
In India, structural inflation exists because of various reasons like–
1. Structure of the Economy is Agriculture Oriented. With a vast majority of population still dependent on Agriculture, which in turn witnesses Monsoon dependence, Droughts, conventional non-scientific methods of farming. Leading to consistently low productivity levels, impacting supply.
2. Infrastructural Constraint impacting supply. Such as Lack of Food Processing, Scientific Farming, Roads, Cold Storages, Refrigerated Vans, etc.
3. Liquidity Constraint – With high levels of NPA, the credit disbursal has become a challenge. This has led to stalled projects, leading to continued lower levels of supply.
4. Lack of Skill Set, Apprenticeships, Quality Education, Research and Developmental activities, Industry-Academia Interactions lead to sustained levels of low productivities.
5. While demographic transition towards more working hands has added to increased disposal income, the supply has not taken off parallely, leading to gaps in the process of meeting demand with supply.
6. Tax and Duty structure incentivising activities that promote cash intensive businesses, staying small to avoid losing tax benefits, informalisation of the enterprise. Inverted Duty Structure helps maintain the import dependence in various products required to build infrastructure in the economy.
7. Governance related deficiencies like Red-Tapism, corruption, acts like Prevention of Corruption Act incentivising inaction by bureaucrats severely impact ease of doing business.
8. Policy Uncertainty added by Judicial Activism adds to undermining the supply creating activities. For instance, cancelling of coal mines, 2G licences by the court.
9. The structure of the Indian Economy still does not encourage contribution by women. A vast majority of population stays under-skilled or unskilled and is involved in tasks with low productivity levels.
10. Structure of the economy still has vast Import Dependence, particularly in the field of Technology & Oil. It leaves a major room to tackle the problem of inflation effectively without being disturbed by external shocks and constraints.
Way Ahead: If the government and the central bank aim to boost growth through the support of loose fiscal and monetary policies instead of structural reforms, which help boosts savings and investments, inflation will be higher than expectations.
Thus, the attempts shall be to reform the structure of the economy by taking various steps such as: – Taxation reforms like GST attempt to formalise the economy leading to greater
– Agricultural reforms like DBT attempt to bridge the gaps in financial inclusion
– Technological reforms like Soil Health Card, Remote Sensing, Digital Inclusion attempt to bridge infrastructural gaps and make the processes accurate and scientific
– E-Governance initiatives like Digital India and its 9 Pillars, MCA-21, e-NAM are attempting to transform how businesses and citizens interact with the government and simplify their operations