How ideology muddled inflation control in India


  • The Governor of the Reserve Bank of India reportedly stated that the inflation rate would be brought to its target level of 4% within 24 months. It had been above this level for 34 consecutive months already. If the prognosis is correct, by 2024 it would have remained off target for close to five years.
  • In the United States and the United Kingdom, the inflation rate has been off target for a lesser period, but it has lately run at rates close to four times the target. Though the characteristics of India’s economy vary substantially when compared to those of the industrialised West, their governments follow the same approach to inflation control, termed ‘inflation targeting’ and implemented by their central banks. Let us assess the effectiveness of such an approach.

Inflation Targeting:

  • It is a central banking policy that focuses on altering monetary policy to attain a set annual inflation rate.
  • Inflation targeting is founded on the assumption that preserving price stability, which is achieved by managing inflation, is the greatest way to generate long-term economic growth.

Indian Scenario:

  • New Zealand was the first country to embrace inflation targeting, and since then, a large number of nations, including India, have chosen it as their primary monetary policy tool.
  • In India, the Monetary Policy Framework Agreement agreed between the RBI and the government in 2015 established inflation targeting as the principal goal of RBI and monetary policy, while also pursuing growth.
  • The RBI is mandated to maintain a rate of inflation of 4% with a 2-percentage-point deviation, i.e. inflation must be kept between 2% and 6%.

Inflation Targeting: Benefits:

1. Enhanced Transparency:

Inflation targeting specifies the rate of inflation that should be targeted in a given economy. With such publicly legislated aims, there is better clarity and predictability in terms of the inflation rate and monetary policy formulation.

2. Promotes Growth:

  • A high rate of inflation diminishes the buying power of the currency, lowers the rate of savings and investment, raises unemployment, and lowers the overall rate of GDP growth.
  • Furthermore, a high rate of inflation is accompanied by larger levels of Fiscal and Current Account Deficits, putting the country’s macroeconomic stability at risk. As a result, a low or moderate amount of inflation would encourage investors to invest in the economy, promoting higher growth and development.

3. RBI’s Autonomy and Accountability:

The RBI has been given entire autonomy in managing the rate of inflation within the prescribed targets under the Monetary Policy Framework Agreement. If the RBI fails to keep inflation within the target range, it would be compelled to explain why in writing. Such a clause allows the RBI to have autonomy while also allowing the government to have greater accountability over the RBI’s actions.

4. Empirical Evidence:

Inflation targeting has shown to be quite successful in certain advanced economies, such as the United Kingdom and New Zealand. These advanced economies have been able to keep inflation at a reasonable level for a longer period of time, resulting in enhanced macroeconomic stability.

Inflation Targeting: drawbacks

1. Disregards the RBI’s multifaceted role:

It is impractical for a central bank in a developing country like India to focus just on inflation without considering the greater development context. The Reserve Bank of India (RBI) must strike a balance between growth, price stability, and financial stability.

2. There is no clear link between price and financial stability:

  • Prior to the 2008 Global Financial Crisis, advanced economies were able to sustain a low rate of inflation for an extended period of time, owing to the use of Inflation Targeting. Inflation targeting was thought to be responsible for the country’s overall macroeconomic stability.
  • However, the 2008 Global Financial Crisis demonstrated that price stability alone does not guarantee financial stability and that a central bank’s excessive reliance on price stability may lead to the neglect of other critical functions such as regulation, resulting in an economic crisis.
  • Many economists hold that there is a trade-off between pricing stability and financial stability and that the more successful a central bank is at maintaining price stability, the more likely it is to jeopardize financial stability.

3. Unemployment Rate:

  • The jobless rate had risen to 6.1 percent in 2019, a 45-year high. Though government data says that in 2020 and 2021, unemployment rate has decreased despite COVID-19 and migrant worker crisis, there is little corroboration from private sector surveys.
  • Inflation targeting has not succeeded greatly to foster economic growth and development.

4. Transmission of Monetary Policy Is Inadequate:

Inflation targeting is better suited to mature economies since monetary policy transmission is more efficient in these countries. However, in India, the transmission of monetary policy is inefficient, which can impair the efficiency of inflation targeting.

5. Low GDP growth:

In order to keep inflation under control, the RBI would have to raise interest rates by implementing a contractionary monetary policy. However, such a strategy would result in a rise in the rate of interest on loans, lowering investment and consumption expenditure and lowering GDP growth rates.

6. Does not address Supply-Side Inflation:

  • Inflation in India may occur as a result of supply-side bottlenecks such as rising global crude oil prices, poor monsoon conditions, and floods, among other things.
  • The current surge in petrol prices, for example, is primarily due to supply-side interruptions, especially globally energy crisis in light of Russia- Ukraine war. In such conditions, the RBI’s influence in lowering inflation rates would be limited.
  • Rather, the Indian government would be forced to handle these supply-side disturbances in order to keep commodity prices in check.

Anglo-American approach to inflation: A particular problem:

  • The approach to inflation currently favoured in Anglo-American economics is the result of an evolution lasting close to a century. The Great Depression of 1930 in capitalist countries (it was not in socialist/ communist major economies like USSR) was as much a crisis for the economics profession, for it was expected to come up with ideas on how the global economy could be lifted out of the morass it had sunk into. The central banks were rendered helpless, for monetary policy, the preferred macroeconomic instrument, proved to be impotent under the circumstances.
  • J.M. Keynes provided the insight that at times, capitalist economies would require “the socialisation of investment”, by which he meant that the state would have to shoulder the burden of maintaining demand in the economy through its fiscal policy.

Impact of ‘oil shocks’

  • The Keynesian principle continued to work after the war, when the reconstruction of Europe meant that aggregate demand was maintained by public spending on the infrastructure that had been destroyed.
  • The consequent unprecedented rise in living standards came to an abrupt end, though, with the two ‘oil shocks’ of the 1970s, when the petroleum exporting countries combined to hike the price of oil. This both sucked demand out of the oil importing countries and gave rise to inflation in them. Stagflation, a combination of inflation and stagnant output, followed.
  • It is indeed correct that The Keynesian General Theory was unprepared for this phenomenon, and a revival of pre-Keynesian economics, with its assumption of a self-regulating economy, occurred. Its leader, Milton Friedman, argued that in an unfettered market economy, unemployment would tend towards the ‘natural’ level, where presumably everyone who wishes to work would be working.
  • Accordingly, public policy should not target unemployment, attempting which could destabilise the economy, and focus on inflation alone. And, inflation was solely a function of money supply growth which must always be controlled.
  • Friedman’s assertion of the optimality of the market gained impetus after the collapse of the former Soviet Union. His diagnosis of inflation led to a clamour for central banks to be made independent of politicians and given an exclusive mandate to target inflation. The arrangement came to be known as inflation targeting, with the claim that the central bank can fine tune inflation by moving the interest rate. The Anglo-American orientation of India’s policy makers meant that this view of inflation control came to be adopted in this country too.
  • Nothing demonstrates that inflation targeting is make-believe more than the runaway inflation presently on view across the world. Inflation in the U.S. and the U.K., is far higher than the targets set for their central banks by their governments, and that in India, is above the RBI ceiling of 6% for a long time now.

Way forward in Inflation targeting:

  • There is limit to the effectiveness of Central banks to do anything in the face of an inflation sparked off by a rise in commodity prices, notably the price of oil and food, as is the case today.
  • Faced with high inflation, Europe’s policymakers exhort that central banks should raise the interest rate further, even if it means triggering a recession. But we can now see that this is no permanent solution to a supply-side driven inflation as the present one is. A recession works to lower inflation when it does by lowering output, and thereby demand; it cannot increase supply, a shortfall in which had caused the inflation to start with.
  • In the face of the evident failure of monetary policy in controlling inflation globally today, central bankers concerned with retaining their relevance make a renewed case for it by arguing that by pursuing a high-interest-rate policy, central banks can ‘anchor’ the expectation of inflation, and thereby inflation itself.
  • A central bank can dampen expectations of a depreciation of its national currency so long as it holds sufficient reserves of the dollar. However, would it have any leverage when it comes to commodity price expectations? No central bank holds stocks of petroleum or wheat. Therefore, it can never directly influence commodity prices, and the public knows this only too well.


  • Coming back to India, there exists published research demonstrating that household expectation of inflation, based on data released by the Reserve Bank of India, is not a determinant of it.
  • This makes it difficult to claim that inflation targeting, which is supposed to work via the central bank’s ‘anchoring’ of expectations, works in India. We have long known what needs to be done to control inflation in India, but the agencies responsible for macroeconomic policy ignore this knowledge when they hitch their wagon to the ideology of Anglo-American economics.
  • Also, Inflation targeting will ensure that there is transparency in the central bank’s role and the targets for inflation in the economy. However, over a long period of time, it hinders the true potential of growth in the economy as it throttles the growth to achieve price stabilization. In extraordinary circumstances such as the COVID pandemic, inflation targeting is not a solution, and caveats for the same can be incorporated into the inflation-targeting frameworks.

The evolving role of CSR in funding NGOs


  • When COVID-19 spurred a nationwide lockdown in India in 2020, a grave need for localised social support emerged. Giving, both private and public, flowed to NGOs working towards combating pandemic-induced challenges such as loss of livelihood for vulnerable communities, food banks, and health and medical support.
  • In any such social effort, programme expenses attract the big cheques — especially when they come from corporate social responsibility (CSR) initiatives in India.

Corporate Social Responsibility (CSR):

  • CSR is a concept that suggests that it is the responsibility of the corporations operating within society to contribute towards economic, social and environmental development that creates a positive impact on society at large.
  • Primary objective of CSR: To promote responsible and sustainable business philosophy at a broad level and encourage companies to come up with innovative ideas and robust management systems. 
  • CSR is based on ‘Trusteeship Philosophy’ of Gandhiji.
Trusteeship is a socio-economic philosophy that was propounded by Mahatma Gandhi. It provides a means by which the wealthy people would be the trustees of trusts that looked after the welfare of the people in general. Gandhi believed that the wealthy people could be persuaded to part with their wealth to help the poor.

Legal framework on CSR in India:

The Companies Act, 2013 is a landmark legislation that made India the first country to mandate and quantify CSR expenditure.

The inclusion of CSR is an attempt by the government to engage the businesses with the national development agenda.

Section 135(1) of the Act prescribes thresholds to identify companies which are required to constitute a CSR Committee – those, in the immediately preceding financial year of which:

  • Net worth is Rs 500 Crore or more; or.
  • Turnover is Rs 1000 Crore or more; or.
  • Net profit amounts to Rs 5 Crore or more.

As per the Companies (Amendment) Act, 2019,CSR is applicable to companies before completion of 3 financial years.

Companies are required to spend, in every financial year, at least 2% of their average net profits generated during the 3 immediately preceding financial years.

For companies that have not completed 3 financial years, average net profits generated in the preceding financial years shall be factored in.

The CSR activities in India should not be undertaken in the normal course of business and must be with respect to any of the 17 activities of CSR mentioned in Schedule VII of the act, including:

  • Eradicating extreme hunger and poverty
  • Promotion of education, gender equality and empowering women
  • Combating HIV-AIDS and other diseases
  • Ensuring environmental sustainability
  • Contribution to the PM’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief etc

Importance of CSR:

Social Responsibility has a strategic importance for two reasons:

  • A healthy business can only succeed in a healthy society. Thus, it is in the best interest of a company to produce only goods and services which strengthen the health of society
  • If the company wants to succeed in the long term it needs to have the acceptance – or licence to operate – from social actors affected by the company’s’ operations.

CSR is increasingly being leveraged to build a positive brand identity for corporations and help their ESG compliance.

About ESG:

Environmental, Social, and Governance (ESG) goals are a set of standards for a company’s operations that force companies to follow better governance, ethical practices, environment-friendly measures and social responsibility.

  • Environmental criteria consider how a company performs as a steward of nature.
  • Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.
  • Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

It focuses on non-financial factors as a metric for guiding investment decisions wherein increased financial returns is no longer the sole objective of investors.

Ever since the introduction of the United Nations Principles for Responsible Investing (UNPRI) in 2006, the ESG framework has been recognised as an inextricable link of modern day businesses.

There is an increasing investor focus on sustainability investing, shifting from finance-centric investment models to more socially and environmentally responsible long-term investing trends. As a result, the demand for Environmental, Social and Governance (ESG) investing has gained significant traction globally.

Funding of NGOs/ CSOs:

  • An NGO working on education outcomes might receive funding for books, other online resources, teacher training, curriculum design, etc. But NGOs have other expenses too.
  • In order to achieve long-term and sustained impact, they need to pay for administrative and support expenses not specifically tied to programmes— for instance, rent, electricity, technology and human resource costs.
  • These organisational development and indirect costs, combined with programme expenses, make up an NGOs’ true costs. And underfunding an NGO’s true costs reduces the efficacy and impact of the very programmes that funders support.

Funding of NGOs: recent developments:

  • If the past few years of enhanced measures against non-governmental organisations (NGOs) operating in India had not put enough of a squeeze on them, then the Ministry of Home Affairs’s long-drawn-out process of scrutinising their foreign-funding licences by year-end is sure to do so.
  • Close on the heels of the news that the Missionaries of Charity group had been denied a renewal of its licence under the Foreign Contribution (Regulation) Act, 2010 (amended in 2020) , comes the revelation that more than four-fifths of the applications of the 22,000-plus NGOs that have sought renewal have yet to be scrutinised .
  • Unless the Government extends the deadline by midnight, all of them stand to lose their ability to access international funding in the new year. As experts have explained, the NGOs have to prove not only that the source of funding and their usage of the funds is appropriate but also establish that their work does not qualify as harmful to “public interest” or “national security” — ambiguous terms that are left to MHA officials to define.
  • So, as many as 2,000 NGOs under scrutiny may be denied a renewal of their FCRA licence as the Missionaries of Charity and its roughly 200 homes around the country have been in this round.
  • Organisations that have particularly faced the government’s ire are those that work in specific “sensitive areas”: pollution and climate change issues, human rights, child labour and human slavery, health and religious NGOs.
  • Prominent names among nearly 20,000 NGOs to have lost their foreign-funding licences since 2014 include Amnesty International , Greenpeace India , People’s Watch , European Climate Foundation , Compassion International and the Gates Foundation-backed Public Health Foundation of India .
  • The actions in India over “foreign hand” concerns seem more hypocritical given the relative ease with which political parties are able to access foreign funds for their campaigns through electoral bonds, under the same FCRA that seeks to restrict funds to NGOs.
  • At a time when India is facing the crippling effects of the COVID-19 pandemic and a long-term economic crisis, the Government’s moves that have resulted in an estimated 30% drop in international non-profit contributions, only hurt the poorest and most vulnerable recipients of philanthropic efforts, particularly those by NGOs working in areas where government aid fails to reach.

CSR Compliance norms:

  • Amendments to the CSR law in 2021 include substantial financial penalties for non-compliance. Roughly 90% of the CSR funders are relatively small, unlisted companies — and companies that spend less than ₹50 lakh annually on CSR are not required by law to have a CSR committee.
  • They generally leave decision-making and action plans to company boards, who may have little to no experience working with NGOs or on social impact. Hence, their priorities tend to sway towards risk avoidance, compliance, and cost minimisation. Several larger companies have added CSR to the responsibilities of their HR or administration or communications head, rather than hiring professional leads, experienced in the social sector.

Way forward:

Pooling resources:

  • How might this change? For one thing, companies can pool their resources with other mission-aligned CSR or social sector stakeholders, increasing their collective impact potential, and also hire or tap into professionals with experience working with NGOs.
  • Since 2020, the number of philanthropic collaboratives, such as the Migrants Resilience Collaborative that supports migrant workers or Revive Alliance that finances semi- and unskilled workers, have more than doubled.

Learn from peer organisations:

  • In addition, CSR funders would learn from peers who view organisational development and indirect costs differently.
  • For example, ASK Foundation, is working to enable better livelihoods for rural communities.
  • The pandemic also exposed how vulnerable NGOs are to financial stress. 54% of NGOs had less than three months in reserve funds in September 2020. This number stood at 38% before the pandemic. Without adequate reserves, NGOs cannot pay salaries or bills when faced with an unexpected funding shortfall.
  • The CSR programmes cannot currently contribute to NGO reserves/corpus by law. However, by covering indirect costs and organisational development, they still help to relieve financial pressure and make organisations more resilient.
  • NGOs don’t have clear financial reporting standards and many lack the internal capabilities to undertake a true-cost analysis. A corporate that has developed a relationship of mutual trust with an NGO could offer volunteer financial analysis services to help the NGO calculate true costs and communicate with other funders, and build financial resilience.
  • For example, Edelweiss has a structured employee engagement programme where senior and mid-level professionals voluntarily offer cashflow and financial management, MIS, digitisation and other support pro-bono to NGOs.


  • Mre CSR decision-makers are shifting their focus from compliance with CSR laws to the social impact they are making. CSR funders are following several themes to make this transition, such as hiring professionals, coming together in collaboratives, and defining and publishing their impact metrics to hold themselves accountable.
  • The idea is to move beyond signing cheques to recognising that, ultimately, what’s good for Indian society is also good for business.


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