Pros And Cons Of Inflation Targeting

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INFLATION TARGETTING IN INDIA: An ANALYSIS OF ITS FEASABLITY
Indian economy is passing through a critical phase with growth rates dropping to a sub 5% range. The predictions for future growth also don’t seem to be bright. The fiscal deficit is looming large ranging at a high 4-5 % of GDP threatening the economy. The retail inflation too is hovering in double digits for the last 24 months. So all in all, a low growth rate, a high fiscal deficit, a high inflation, a high CAD prompted the S&P to warn India of downgrading its investment status to JUNK. Now, inflation targeting seems to be the most suitable solution that will dole out India’s economy. The recent RBI expert committee report too suggested that India should adopt inflation targeting as its sole policy. With the committee’s recommendations almost getting accepted unofficially, India is on the verge of jumping into the bandwagon of the much touted Inflation Targeting Framework countries. This situation calls for a heated debate on the pros and cons of issue.
Inflation targeting (henceforth IT) as a monetary framework has been tested for over 2 decades by many nations across the world. Currently there are 34 nations officially adopting inflation targeting as their sole monetary policy. This includes 25 developing nations and 9 developed nations.
Now the crucial questions that needs serious discussions are
Is this the right time to undertake inflation targeting?
The prospects of inflation targeting in India has been subject to intellectual debate from the past 15 years. The Percy mistry committee (07), The Raghuram Rajan committee (08) also recommended the IT. But it was later on rejected citing absence of financial stability .however after adopting the BASE...

... middle of paper ...

...it shuns speculation,attracts FII’s which would boost investment and thus propels economic growth.

Methodology
As a social scientist we don’t have the advantage of a laboratory like condition where we can undertake experiments,our only hope is the historical data , which luckily is available aplenty in this case.the IT countries can be broadly classified into two groups the developed nation and the emerging market economies. A developed economy differs significantly from transitiobnal economies like india in a wide range of structural aspects such as financial institutions,monetary transmission mechanism,central bank independency,etc. This makes the comparision inconsequential.so ,i would like toemphasize on the cross national study with a focus on emerging market economies (EME) like the G20 countries which bear a signifivant resemblence to our economy.

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