The proposal that Parliament should set the inflation target rather than the RBI, which does so at present, seems a good move though it would present quite a challenge. This has been suggested in the RBI-appointed Urjit Patel Committee’s recommendations on monetary policy reforms.+
This recommendation, if accepted, would relieve a lot of tension between the government and the RBI governors. While Dr Raghuram Rajan has had a relatively smooth relationship with Union finance minister Arun Jaitley, his predecessors had a tough time with the then finance minister, P. Chidambaram. However, if Parliament has to set the inflation rate, it will have its own challenges.
For instance, how will different parties in Parliament agree on one figure of inflation? How will Parliament say they will put inflation at six per cent, which means that they don’t mind if people have to live with such high inflation. On the other hand, a very low number would be unrealistic. The issue is a political hot potato since nowhere in the world do governments get kicked out because the price of onions hit the roof.
Today the BJP has an overwhelming majority in Parliament. So, may be, it can fix a rate. But what if a coalition government comes in? But the sticky issue of how this inflation number will be fixed remains even if one party has a majority. Will it be decided by politicians or will the government appoint a committee of economists to fix an inflation number?
