The BJP does not want to become the Congress.

The government has accepted a retail inflation rate of 4% (+/- 2%) as its target for the next 5 years. This despite some fierce criticism of the Governor of the Reserve Bank, Raghuram Rajan by elements within the BJP. In India all wealthy people, and their friends in politics, are constantly arguing for low interest rates and since they control the media their views always make the headlines. Their logic is persuasive. Low interest rate will make it cheaper to borrow money, which will enable them to invest more in setting up industries, which will create more jobs and boost the economy. Trouble is that it is no point producing goods if there is no demand and demand can increase only if people have money left over after essential expenses, like food, education and healthcare. The debate is about whether policy rate should be guided by retail prices or wholesale prices. In western countries a rise in price caused by an improvement in quality is not counted as inflationary. This is called 'hedonic' rise in price. True, but prices of cars, cell phones or HD televisions are not counted in a family's expenses basket anyway. Indians spend an average of 30% on food as compared to a minuscule 6.5% in the US, manual laborers spend a far higher proportion of their income on food. If the cost of food goes up there will be less to spend on other expenses. The government can control the price of food by keeping a close eye on food production and importing those likely to be in short supply. That produces a clash with farmers, an important vote bank, who want higher prices for greater profits. Farmers suffer huge losses if there is a glut. Also the government must keep within its spending target to keep fiscal deficit in control. The RBI has brought down policy rate from 8% to 6.5%, which has resulted in a fall of 100 basis points in corporate bond yields, and growth has climbed to 7.95% but the clamor for still lower rates has not gone away. So why have politicians agreed with the RBI? Perhaps, the government is aware that the Goods and Services Tax, which will unify all central and state indirect taxes, will increase prices initially and there will be a loss of jobs as the informal sector is dragged into the tax net, which it has been evading till date. With competition disappearing the big boys will be able to jack up prices hurting consumers even more. Retail inflation has already breached 6% and will rise further as vegetable supplies start to fall. The GST will come into effect sometime next year and the full effect will be felt in 2018. With general elections in 2019 the BJP will be acutely aware of the collapse of the Congress in 2014 because it chose to ignore high retail inflation. Seems that the 'invisible hand' of Adam Smith works on politicians as well. Just as well.