Chief Economic Advisor V Anantha Nageswaran on Friday said monetary policy tools such as interest rate adjustments could become less effective in tackling inflation in a world increasingly vulnerable to supply-side disruptions.
"Fiscal and other public policy measures will be more important because raising interest rates will not solve the supply-induced problems. If anything, it may even be counter-productive," he said at the 9th Annual Food Systems Dialogue in New Delhi.
Amid persistent supply-induced disruptions, countries would have to use all kinds of flexibilities within the inflation-targeting framework, he said.
"Since 2022, very few countries have met their inflation target. So, it will be there as a framework, but I think countries will take creative liberties with it, as they have to," he added.
Supply chain disruptions following the Russia-Ukraine war, which began in February 2022, and the subsequent West Asia crisis have led to soaring prices worldwide, particularly those of energy.
In a bid to rein in inflation, major central banks across the world, including the US Federal Reserve, have raised interest rates.
The Reserve Bank of India (RBI) also raised the repo rate by 25 basis points to 5.50 per cent last month, marking its first increase in nearly four years, to rein in inflation, which crossed the central bank's upper tolerance limit of 6 per cent in October.
This was the first time in two years that retail inflation had breached the RBI's upper tolerance limit of 6 per cent. The central bank is mandated to keep inflation within a range of 2-6 per cent. In October 2024, retail inflation stood at 6.25 per cent.
Citing reports, Nageswaran said supply shocks would dominate the world over the next 25-30 years, or even longer.
"As countries weaponise supply chains and use natural waterways and other choke points, the ability to solve these problems by simply cutting or raising interest rates will no longer be feasible," he said.
In such a scenario, Nageswaran called for bringing agriculture back as the main driver or engine of economic growth.
He also flagged that the emergence of artificial intelligence and immigration restrictions in different countries could slow job creation in the services sector.
(With inputs from PTI)
