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The 'new normal' for India
Wed, 6 Apr Pre-Open

The term 'new normal' is credited to renowned technology investor Roger McNamee. The man who has the reputation of being the sounding board for the likes of Bill Gates and Marc Zuckerberg. It thus goes without saying that the man coined the term to denote path breaking changes. Ones that would not be a fad but could linger for a very long time.

Later many economists, analysts and even policymakers have used the term to envision the future. However, the least expected was the Indian central banker calling higher inflation a new normal. Trends of price rises have been as cyclical as is the monsoon in India. Every four to five years the country has witnessed steep rises in price levels accompanied by monetary tightening. The quantum of rises and falls, however, has been dependant on global demand and supply. Especially, after the opening up of the economy.

The latest inflationary trend, nevertheless, has been one of the most long lasting one. Chances are that it is here to stay. At least that is what the RBI predicts. Sustained rise in commodity prices are expected due to the consumption patterns of emerging and populous economies like India and China. The RBI's interest rate hikes have had no impact whatsoever in the past 18 months. It may continue to remain unsuccessful in reining price rises though monetary measures unless the developed markets stop printing money. Which means that for a reasonable period the Indian economy will have to confront higher costs. What is more with negative real interest rates that scope for savings and investment will also deteriorate.

What the RBI is most worried about is that the inflation trend is no more restricted to food prices. In fact rise in input costs has been witnessed across sectors. Thus while companies raise prices to retain profitability, consumers may find it increasingly difficult to enhance their spending power. There can be nothing more lethal for a developing economy like runaway inflation.

Thus the RBI terming high inflation as the 'new normal' is a serious concern for those betting on high growth for the economy. The policymakers who prefer to cite higher GDP growth rates in the future to camouflage current failures would do well to take note of this.

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