World’s Second Largest Nation Takes Another Step Away From Keynes
India’s central bank is moving away from its reliance on a wide array of aggregate economic metrics, some of which are based on the flawed Keynesian model, to focus exclusively on fighting consumer price inflation in its monetary policy. This is a step in the right direction. Why it took so long to make is beyond me. India is a perfect disconfirmation of the Keynesian error which says that growth is inflationary and stagnation is deflationary. India has been a slow growth, high inflation country for almost all of its post-colonial history and has continued to be in recent years. It’s a poster child for stagflation, a condition which Keynesians used to believe was economically impossible.
“It’s encouraging that the committee specified headline inflation, rather than core inflation, given that as a poor country, India has a consumer basket that’s about 60% food and fuel. The RBI previously targeted “multiple indicators”—a jumble of inflation, growth, financial stability and exchange rates that confused investors about the bank’s intentions.
If Mr. Rajan adopts the new target, investors should gird for higher rates. As it stands, RBI’s policy rate is more than two percentage points below inflation. The inflation target would start at 8% in the first year, then drop to 6% and eventually to a range of 2% to 6%. Considering how stubborn Indian inflation has been, one could imagine the need to raise rates aggressively to stick to the target.”