Inflation falls but not unemployment, Pg7

Context:

• While India’s headline inflation fell to 2.8% in May 2025, unemployment rose to 5.8% during the same period. The author questions the effectiveness of monetary policy, particularly the RBI’s inflation-targeting framework, in addressing macroeconomic challenges such as joblessness and slowing growth.

Key Highlights:

• Inflation (YoY CPI): Fell from 3.2% in April to 2.8% in May 2025.
• Unemployment Rate: Rose from 5.1% in April to 5.8% in May (Periodic Labour Force Survey data).
• GDP Growth Rate: Declined from 9.2% in 2023–24 to 6.5% in 2024–25.

Detailed Insights:

1. Employment vs. Inflation Trade-off:

• Inflation control is meaningless for the unemployed, who gain no relief from lower prices if they lack income.
• The jobless cannot be blamed for “choosing not to work,” especially in the Indian context with visible underemployment in urban and semi-urban areas.

2. Sectoral Growth Impact:

• Agriculture saw accelerated growth, non-agriculture sectors (including services) witnessed deceleration.
• The narrowing growth gap between these sectors explains the disinflation, especially in food prices.

3. Critique of RBI’s Role:

• Monetary policy alone could not have caused the sharp disinflation.
• The decline in food inflation is a result of agricultural output catching up with demand, not repo rate hikes.
• RBI appears to be reactive, not proactive — hinting at lowering rates after inflation falls.
• Demand-contraction tools (like rate hikes) are ineffective against supply-side inflation.

Key Concepts Involved:

• Inflation targeting:  is when a central bank sets a clear inflation goal and adjusts policies to keep inflation near that target.
• Monetary policy:  is the set of actions by a central bank to control the money supply and interest rates in order to achieve economic goals like price stability, low inflation, and sustainable growth.