Thursday, October 15, 2020

Why are trilemmas so impossible?

 "Consumer inflation in the country increased to 7.34 percent in September from 6.69 percent in the previous month as food prices continued to move higher, government data showed on Monday." "Food inflation was recorded at 10.68 percent last month compared to 9.05 percent in August." "India's wholesale price inflation accelerated in September touching a seven-month high of 1.3%, mostly because of rising food prices, which may force the Reserve Bank of India (RBI) to opt for a prolonged pause on policy rates." "The increase in food prices have come against the backdrop of a good agricultural season," wrote Karan Bhasin. "Supply disruptions following the Covid-19 outbreak and subsequent curbs increased costs." "A rise in minimum support price (MSPs) besides aggressive government procurement could also put pressure on food prices." However, if supplies have been constrained, demand must also have fallen substantially because all hotels, bars and restaurants have been closed till now. "Urban retail inflation in services was 7.74% in September, while rural came in lower at 6.12%," wrote Aparna Iyer. "What is keeping core inflation elevated is telecom price hikes last year and a second round impact of the large hike in retail fuel prices on bus fare, taxi etc." wrote analysts from Edelweiss Securities. The Indian economy has been grappling with a series of 'impossible trilemma' choices, wrote Niranjan Rajadhyaksha. No country "can simultaneously have an open capital account, a flexible exchange rate and an independent monetary policy". "India is far from ready for embracing capital account convertibility. The SS Tarapore panel on capital account convertibility laid down the preconditions: 3 percent fiscal deficit, 3 percent current account deficit and 1 percent NPA." Combined fiscal deficit of Center and states is likely to touch 12% this year and NPAs may soar to 14% as debt moratorium comes to an end. Prof Dani Rodrik proposed that it is "not possible to maintain national sovereignty, economic globalization and democracy simultaneously". This government is returning to a policy of import substitution industrialization (ISI) which we followed till 1991 and which ended in failure, wrote Prof Arvind Panagariya. "The Indian state is the antithesis of what any state should do. It barely provides public goods and is instead overwhelmingly present in provisioning and subsidizing private goods or regulating private interactions," wrote Prof Shruti Rajagopalan. Another impossible trilemma is that "It is not possible to keep farm support prices high, retail food prices low and overall inflation under control." "Union Minister Rajnath Singh assured the farm community that the Minimum Support Price, MSP will not only stay, it will be continuously increased too in coming years." Which means, the government will continue to fan retail inflation. That's why trilemmas are impossible. 

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