Chief Economic Advisor (CEA) V Anantha Nageswaran stated on Friday that monetary policy tools, such as interest rate adjustments, may become less effective in combating inflation as the global economy increasingly faces supply shocks. He emphasized that fiscal and other government measures must take on the majority of the burden.
Nageswaran noted that raising interest rates will not resolve issues stemming from supply shortages and could, in some cases, be counterproductive, pointing to rising supply-driven inflation.
Speaking at the 9th Annual Food Systems Dialogue, Nageswaran reported that inflation targeting will remain the foundation of the policy framework amid constrained supply, though countries can 'creatively deviate' from it or abandon it if it becomes a serious constraint.
These statements came after the release of data from the National Statistical Office, which showed that retail inflation in India exceeded the Reserve Bank of India's tolerance upper limit of 6% for the first time in two years in October. The RBI Monetary Policy Committee is expected to raise interest rates by another 25 basis points at its meeting scheduled for December 2 to 4.
Economists agreed that raising interest rates alone is insufficient to address supply issues, although they disagree on how far monetary policy can go in curbing inflation.
Madan Sabnavis, Chief Economist at Bank of Baroda, suggested that higher interest rates are incapable of either increasing food stocks or lowering oil prices. He added that policy intervention regarding crude oil has limited potential to reduce prices unless the government assumes significant subsidies, which is complicated by fiscal constraints.
Madhavankutti G, Chief Economist at Canara Bank, believes that monetary policy remains relevant because it anchors inflation expectations, even when supply factors play an excessive role. He explained that monetary policy is largely ineffective against supply-side inflation, such as sharp increases in crude oil prices due to geopolitics, but inflation driven by demand growth—observed in increased spending on healthcare, consumer goods, and education, as well as money supply growth at 12-13% annually—cannot be ignored.
Nageswaran stated that the Covid pandemic ended a certain era, marking the world's transition from globalization and integration to segmentation and fragmentation. He predicts that supply shocks will dominate the world over the next 25-30 years.
The economic advisor also added that while demand will grow slowly, supply shocks will recur globally, often intentionally, as countries use supply chains and strategic bottlenecks as weapons.
Calling for a rethinking of development priorities, Nageswaran also argued that agriculture must once again become the engine of growth. He stressed that in the post-Covid world, agriculture must return as a driver of growth.
He noted that the conventional sequence from farms to factories and then to services is under pressure. Manufacturing faces challenges from China, which views this sector as a strategic priority and mobilizes the full power of the state behind it. Meanwhile, services face disruptive consequences from artificial intelligence (AI), which threatens entry-level jobs traditionally at the bottom of the career ladder, as well as tightening immigration restrictions abroad.
Agriculture, conversely, is 'largely within your control,' he added, clarifying that this does not mean abandoning production. He concluded that all three sectors must develop jointly.
Also speaking at the dialogue, Saurabh Garg, Secretary of the Ministry of Statistics and Programme Implementation (MoSPI), stated that reliable data is the foundation of sustainable, inclusive, and long-term food systems. He noted that the focus must shift from measuring farm yields to understanding the entire food system, including farm productivity, farmer livelihoods, consumption, nutrition, prices, employment, and environmental sustainability.
Garg reported that India's agricultural data ecosystem is rich and expanding, but the next step is to enhance the usability of this data by moving from availability to intelligence. This will require machine-readable, interoperable, and AI-ready data built on common standards, enabling AI-based analysis, improving research, and developing more targeted policies.
