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Friday, January 15, 2021

Inflation got back into the target zone

by Ajay Shah.

On 20 February 2015, MOF and RBI signed the `Monetary Policy Framework Agreement', and the power of monetary policy (i.e. setting the short term rate) got connected to an objective (get y-o-y CPI inflation to 4%, with a permissible range from 2 to 6 per cent). For some time thereafter, it worked rather well.

From late 2019, we have had problems with inflation. In December 2019, the bound was breached, when inflation reached 7.36 per cent. In the 12 months from December 2019 to November 2020, there was only 1 month (March 2020) where the value at 5.84 was within the 2-to-6 range.

There was considerable angst about this. For many people, aggregate demand was clearly adversely affected by social distancing, and the task of monetary policy was to stimulate demand. In this period, headline inflation being above 6 per cent was an irritant. It even proved, to some, that the very concept of inflation targeting was flawed. There was the angst that is often heard in India, about supply constraints that shape inflation.

RBI eased monetary policy using the many instruments that it possesses, including the repo / reverse repo rates where the votes of 3 external members of the MPC also count.

In my research network, we felt comfortable about this stance of monetary policy:

  • Our models, which work with seasonally adjusted data, suggested that headline inflation would drop in December. 
  • We expected that the easing of supply restrictions that comes with post-pandemic normalisation would help address glitches in the price system.
  • Our macroeconomic common sense suggested that at a time of weak aggregate demand, inflationary pressure was going to be low. 
  •  In any case, monetary policy acts with a long delay. Headline inflation (a moving average of the point-on-point inflation of the latest 12 months) is a poor guide for anticipating headline inflation about one to two years out.

These arguments fed into our writings of this period: 7 Apr, 24 Jul, 24 Aug, 4 Dec, 11 Jan (the day before the December CPI release). 

We now have a data release for December 2020 and headline inflation was reported at 4.59 per cent, which is close to the target of 4 per cent, and well below the upper bound of the target range, of 6 per cent:

Headline inflation, in the inflation targeting period

I am reminded of Ken Rogoff who once said "Those who think inflation is caused by too little pork rather than too much money are wrong" (in the Financial Times, 4 February 2008). It speaks well for the Indian economic policy process, that the Ministry of Finance and RBI stayed the course through this period, and protected the inflation targeting system.

Wednesday, January 13, 2021


Roundtable on public procurement and its impact on firms in India

The Finance Research Group and the Chennai Mathematical Institute are organising a web-roundtable on 'Public procurement and its impact on firms in India' on 22nd January, 2021 from 9:00 am to 12:30 pm. The roundtable will focus on identifying key issues in public procurement in India, distinguishing the symptoms from the causes and the pathways to building greater capacity in commercial contracting by the state.


The Indian state is a large procurement body. Beginning with the central government and its agencies, CPSEs, state governments, SPSEs, municipal bodies, the state has a large presence in commercial contracting. Estimates suggest that the size of public procurement in India ranges from anywhere between 15-20% of GDP.

The discourse on public procurement in India has conventionally focused on issues of red tape, corruption and payment delays. Dues of the government to private enterprises are reported to have reached a magnitude large enough to be a drag on the economy. However, much of this discourse has been largely anecdotal. Over the last few years, digitisation of large parts of the Indian economy has created new sources of data that could support research-based analyses of the problems of public procurement and its impact on the financial health of firms.

This roundtable brings together academic researchers, practitioners and policymakers, to present and discuss their research to an interested group of peers and experts to elicit views and comments on their work.


08:55 - 09:00 Welcome address
Susan Thomas, Economist
09:00 - 09:35 A cross-country comparison of procurement laws
Diya Uday, FRG-CMI and Anjali Sharma, S.P.Jain Institute of Management and Research
        Discussant: Sudha Krishnan, Department of Atomic Energy, Government of India (Retired)
09:35 - 10:10 Inefficiencies in government procurement processes: a demonstration
Anjali Sharma, S.P. Jain Institute of Management and Research and Shubho Roy, University of Chicago
        Discussant: Santhosh Mathew, BMGF
10:20 - 10:55 Break
10:10 - 10:20 Dispute resolution in public contracts: evidence from courts
Devendra Damle and Karan Gulati, NIPFP, Anjali Sharma, S.P. Jain Institute of Management and Research & Bhargavi Zaveri, FRG-CMI
        Discussant: Surya Prakash B.S, Daksh
10:55 – 11:55
Panel: Payment delays in public procurement contracts
Susan Thomas, Economist
Ajay Shah, Economist
Junaid Ahmad,World Bank
Rajiv Mehrishi, Former Comptroller and Auditor General of India
K.P. Krishnan, NCAER
Pradnya Saravade, Maharashtra State Police Housing Corporation
11:55 - 12:10 Summing up
Devesh Sharma,, BMGF
12:10 - 12:15 Closing remarks
Susan Thomas, Economist

For those interested in attending the roundtable, please get in touch with Shyna Adhia on