Inflation targeting and Viksit Bharat at 2047: A framework for review

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Central banking is forward looking. India is pursuing a path of Viksit Bharat@2047 (VB) since last year. To ensure rapid growth, two factors are most important — optimal utilisation of labour and capital. In India, fortunately, labour is available in abundance, with nearly 67.3 per cent of the population, or about 93 crore people, between the working age of 15 and 59 years. Further, nearly 27.2 per cent of the population, or about 39 crore people, are aged between 15 and 29 years. It is estimated that about 1 crore people are entering the workforce every year. India is in the midst of a demographic dividend and is attempting to use its young population to successfully launch start-ups. This window of demographic dividend is available only for the next two decades, after which, given the demographic trend, India will also have a fast-rising elderly population above 60 years of age — from 11 per cent in 2025 to 20 per cent in 2047. Increasing productivity in those circumstances would be more challenging. 

The concept of inflation targeting adopted earlier in 2016 in India could be stifling much-needed growth. While the Government of India has defined Viksit Bharat in a balanced manner, considering inclusive growth and not just restricted to per capita income, still, stifled growth can impact employment. The government has defined VB in terms of zero poverty; good-quality education and health care; 100 per cent skilled labour; 70 per cent female labour force participation; and empowered farmers to make India the food basket of the world. 

The inflationary trend in the last few years is very clear and has mainly been on account of a few agricultural goods or fuel. The increase in prices in most cases is due to potato, onion or tomato (POT). The issue is: would farmers understand the dynamics of increased price levels of these commodities impacting the economy through higher repo rates or interest rates? In other cases, it is the specific price of energy that raises the price level. The international market is the cause of fluctuations in the price of oil, and India changing interest rates due to higher oil prices will not influence price fixation by OPEC or other oil-producing countries. But raising interest rates in India due to POT or oil impacts business investment and purchases of houses, home appliances, vehicles and other products mainly on loans. Thus, unwarranted high interest rates, non-aligned with the goods and asset markets in India, deter output and harm growth prospects, leading to high sacrifice ratio.

 

The US, a rich country with extensive social security, can afford a sacrifice ratio, but can India afford it? Given the young demographics, hard-working nature of Indians, encouraging government policies and conducive economic environment, India can easily record a growth rate of 9.5 to 10 per cent in per capita income. If India is recording a 6.5 per cent growth annually, then the potential sacrifice ratio is 3 per cent. On an average, on the base of per capita income at current prices of Rs 234,859, illustratively, for every 1 per cent sacrifice of growth annually, a loss of Rs 1,000 per month for a family of five is indeed high. This sacrifice or loss is transmitted to all sectors of the economy.

 

So, should India not be satisfied and content with 6.5 per cent growth rate? Certainly no. Can India grow around 10 per cent in the current economic and global situation? Certainly yes, exactly as South Korea and China grew against all odds — domestic and global — and the worst challenges during 1962–1989 and 1980–2012, respectively.

 

India’s monetary policy framework, centred on inflation targeting since 2016, is under review through a recent RBI discussion paper. But the issue of inflation targeting needs to be examined afresh as India has recently embarked upon a journey for VB amidst global uncertainties like the Russia–Ukraine war. Further, the setting in of the AI regime — a revolution, as many intellectuals call it — is bound to hurt teeming young millions in India. So, the only priority has to be employment generation in the country.

 

To be economically relevant in the changing global scenario and regional geopolitics, the importance of high growth and per capita income has strongly emerged. To achieve that coveted status of developed global power, other countries like China and Indonesia are also chasing a similar dream. Interestingly, Indonesia, with a per capita income of $5,000, had embarked on the mission of Golden Indonesia in 2019 to achieve developed-nation status by 2045, their centenary year of independence. And China is already around $13,000 compared to India’s $2,880 and America’s $85,000 per capita income.

 

India cannot afford to lose this “Amrit Kaal” window, and with the recent call in May 2025 by the PM at NITI Aayog, all policy objectives need to be revisited and realigned to VB@2047. India’s ill-conceived and hurriedly adopted inflation targeting is one such initiative that needs to be carefully evaluated.

 

The author is CEO, EGROW Foundation 

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper