The RBI will be releasing its monetary policy today and there are expectations of a hike in interest rates as high inflation continues to persist in the Indian economy. Having said that, while these are measures that would tone down inflation in the near term, certain issues will have to be addressed to ensure that inflation in the longer term is on the lower side. This will have to be done by doing away with certain roadblocks that have hampered India's growth. These are inadequate power capacity, roads and ports all of which also play a role in driving up prices.
In the past one year, poor monsoons pushed food prices higher. But of late a trend of rising non-food inflation has also been observed. This is because domestic demand pressures are building in the Indian economy without a commensurate increase in capacity creation. Plus, rise in global commodity prices has meant that non-food inflation is likely to stay on the higher side.
Consider these statistics. As reported on Bloomberg, India produces about 10% less electricity than it needs. As far as roads are concerned, while they account for 65% of the nation's cargo, they are plagued by single lanes and irregular surfaces. This then boosts companies' costs. Infrastructure spending accounts for just 4% of India's GDP compared with 9% in China. Increasing costs for commodities such as oil are also fuelling price pressures given that India imports around 70% of the oil that it consumes. Infact, crude oil prices have surged 70% in the past year.
Thus, the inflationary trends strengthen the case for a hike in interest rates. And all eyes will therefore be on Mr. Subbarao when the monetary policy is outlined later today. But in the longer term, taking serious steps towards removing infrastructural roadblocks will go a long way in bolstering the health of the Indian economy.