daily editorial analysis for 15 November 2025

Flexible Inflation Targeting, A Good Balance

Context

• As India approaches the 2026 deadline for reviewing its Flexible Inflation Targeting (FIT) framework, currently defined as maintaining inflation at 4% ± 2%, the Reserve Bank of India (RBI) has initiated a substantive discussion on the future direction of monetary policy.
• Three core questions guide this review: whether policy should target headline or core inflation; what constitutes an acceptable level of inflation; and what the appropriate inflation band should be.
• Each issue has profound implications for macro­economic stability, household welfare, and policy coordination.

Inflation Control as a Policy Priority

• The foundation of the argument is the recognition that inflation control is an essential objective of monetary policy.
• High inflation operates as a regressive consumption tax, impacting poor households disproportionately, eroding real savings, discouraging investment, and generating economic uncertainty.
• The Chakravarty Committee had earlier suggested an acceptable rise in prices of about 4%, although the reasoning was not fully transparent.
• Since the dismantling of automatic monetisation in 1994, the RBI has enjoyed increased functional autonomy, culminating in the formal adoption of FIT in 2016.
• Since then, inflation has generally remained range-bound despite multiple external and domestic shocks. This stability underscores the success of a still-evolving framework.

Headline vs Core Inflation: What Should Monetary Policy Target?

• A persistent debate concerns whether policy should target headline inflation (total CPI) or core inflation (excluding food and fuel).
• The argument for targeting core inflation assumes that food inflation is driven mainly by supply shocks and is beyond the scope of monetary intervention.
• However, several observations contradict this view:
• Food inflation is not always exogenous. During periods of expansionary monetary policy, food inflation tends to accelerate more strongly, indicating that monetary conditions matter.
• General inflation arises from excess liquidity, not simply individual price movements. As Milton Friedman argued in his 1963 Mumbai lecture, inflation results when aggregate demand expands alongside money supply.
• Indian data demonstrate second-round effects of food inflation, whereby rising food prices fuel increases in wages and input costs, eventually influencing the general price level if liquidity conditions permit.
• These dynamics reinforce the conclusion that headline inflation should remain the primary target of monetary policy.
• Doing so ensures broader protection for household welfare, prevents inflationary spirals, and aligns with the ultimate goal of price stability.

Determining the Acceptable Level of Inflation

• The question of an appropriate inflation rate intersects with the long-standing debate over the Phillips Curve.
• While early interpretations suggested a trade-off between inflation and growth, later theory and evidence, especially from Friedman and Phelps, established that any such trade-off is short-term and vanishes once expectations adjust.
• Empirical evidence for India since 1991 reveals a non-linear relationship between inflation and growth. A quadratic estimation finds an inflection point around 3.98%, implying:
• Inflation up to about 4% may support growth.
• Inflation above 4–6% harms growth significantly.
• Forward-looking simulations for the 2026–2031 period suggest that the acceptable inflation rate may lie slightly below 4%, assuming stable fiscal and external conditions.
• This indicates that there is little justification for raising the inflation target above 4%.

Reconsidering the Inflation Band: Adequacy of ±2%

• India’s current inflation band of 4% ± 2% has offered the RBI sufficient flexibility to navigate uncertainties. However, two issues deserve attention:
• Duration near the upper limit matters. The framework does not specify how long inflation may remain close to the 6% upper bound. Prolonged stays near this limit risk undermining the credibility and intent of FIT.
• Growth falls sharply when inflation exceeds 6%. Empirical patterns show that inflation above 6% correlates with a marked decline in growth, weakening any case for a wider band.
• The strength of the band is also tied to fiscal discipline. Historically, high inflation in the 1970s and 1980s stemmed from monetisation of fiscal deficits.
• Key reforms including the abolition of ad hoc treasury bills and the Fiscal Responsibility and Budget Management (FRBM) Act, curbed this risk.
• FIT logically follows from these reforms. Thus, FRBM and FIT must operate together. Weakening either framework would threaten macroeconomic stability.

Conclusion

• India’s review of the FIT framework represents a crucial opportunity to refine its approach to price stability.
• Headline inflation should remain the primary target, given its broader welfare relevance and demonstrated linkages with core inflation.
• An acceptable inflation rate of around 4%, or slightly lower, aligns with India’s empirical growth-inflation dynamics.
• The present ±2% inflation band provides adequate flexibility, but monetary authorities must avoid prolonged proximity to the upper limit to maintain credibility.
• Ultimately, India’s monetary–fiscal coordination, anchored through the FRBM Act and the FIT framework, remains essential for ensuring macroeconomic stability, safeguarding household welfare, and sustaining durable economic growth.

Flexible Inflation Targeting, A Good Balance FAQs

Q1. Why is inflation control considered essential in India?

Ans. Inflation control is essential because high inflation harms poor households, reduces savings, and creates economic instability.

Q2. Which inflation measure is more suitable for India’s monetary policy target?
Ans. Headline inflation is more suitable because it captures food-price shocks and reflects their broader impact on wages and overall prices.

Q3. What is the estimated acceptable level of inflation for India?
Ans. The acceptable level of inflation for India is around 4%, or slightly below.

Q4. What happens when inflation exceeds 6%?
Ans. When inflation exceeds 6%, economic growth declines sharply.

Q5. Why must FIT and FRBM frameworks work together?
Ans. FIT and FRBM must work together because fiscal discipline supports price stability and prevents inflation driven by deficit monetisation.

 Source: The Hindu

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The Great Nicobar Project and a Ministry in Knots

Context

• Recently, the Union Environment Ministry informed the National Green Tribunal that the ₹92,000-crore Great Nicobar mega infrastructure project will significantly affect the island’s rich forests and biodiversity.
• The project — which includes a transshipment port, airport, power plant, and tourism township — has faced intense legal scrutiny.
• Defending the 2022 environmental clearance, the government acknowledged that Galathea Bay, the proposed port site, contains over 20,000 live coral colonies, more than 50 nesting mounds of the endemic Nicobar Megapode (a Schedule I species), and is an active nesting ground for the Giant Leatherback turtle.
• The Ministry stated it was aware of these impacts and has committed to mitigation and conservation measures extending until 2052.
• This article highlights the serious environmental, legal, and procedural contradictions surrounding the ₹92,000-crore Great Nicobar infrastructure project.
• It reveals how the Environment Ministry’s own admissions, CRZ reclassification disputes, and overlooked ecological data undermine the integrity of its clearance process.

Environment Ministry’s Contradiction on Great Nicobar Conservation

• The Ministry’s justification of mitigation measures for the Great Nicobar project raises deeper concerns about why such measures are needed in the first place.
• By treating the project as inevitable and offering mitigation as a remedy, the Ministry obscures its own role in permitting it and neglecting its core mandate of conservation.
• A major contradiction lies in the 2021 decision of the National Board for Wildlife to denotify the Galathea Bay Wildlife Sanctuary — an area proposed since 1997 to protect leatherback turtles, corals, megapodes, mangroves and saltwater crocodiles.
• The same institution responsible for safeguarding this critical habitat removed its protection, only to later propose conservation plans, highlighting a clear conflict between statutory duty and actual decision-making.

Controversy Over CRZ Classification and Procedural Transparency

• Under Indian law, ecologically sensitive coastal areas — including mangroves, coral reefs, turtle nesting sites and protected areas — fall under CRZ-1A, where major construction like a port is strictly prohibited.
• Galathea Bay meets all these criteria. Yet, despite this, the Environment Ministry has tried to justify the Great Nicobar port project, creating contradictions in its own regulatory framework.
• The issue became stark after the NGT’s April 2023 order confirming that the port site had over 20,600 coral colonies and fell within CRZ-1A, where ports are banned.
• The Tribunal asked a high-powered committee to reassess the site.
• This committee relied on a confidential survey by the National Centre for Sustainable Coastal Management (NCSCM), which unexpectedly concluded that no part of the project area was CRZ-1A, thereby making the port “permissible” as CRZ-1B.
• This reasoning is circular: CRZ-1A areas were seemingly reclassified as CRZ-1B solely to allow the project.
• Moreover, neither the NCSCM report nor the committee’s submission has been made public.
• The Ministry has withheld them on the grounds of defence sensitivity, even though the denotification of the wildlife sanctuary and the CRZ downgrade were done for commercial development, not defence purposes.

Ministry’s Own Admission Undermines CRZ Reclassification Claims

• Forest Department data shows over 600 leatherback turtle nestings in 2024, one of the highest recorded for Great Nicobar.
• If these ecological facts are accurate, Galathea Bay clearly qualifies as CRZ-1A, deserving maximum protection.
• This directly contradicts the high-powered committee and NCSCM reports claiming the site is not CRZ-1A.
• The contradiction raises deeper concerns: either the Ministry’s legal submission or the committee’s scientific assessment is flawed.
• This inconsistency points to serious issues of scientific integrity, procedural propriety, and transparency in the approvals granted for the project.

The Great Nicobar Project and a Ministry in Knots FAQs

Q1. Why is the Great Nicobar project facing intense scrutiny?

Ans. It threatens a biodiversity-rich island, including coral colonies, leatherback turtle nesting sites, and megapode habitats, prompting legal challenges and questions on the validity of its environmental clearance.

Q2. What contradiction exists in the Ministry’s conservation stance?

Ans. The Ministry promotes mitigation plans while having previously denotified the Galathea Bay Wildlife Sanctuary, undermining its mandate to protect habitats it later claims to conserve.

Q3. Why is the CRZ reclassification controversial?

Ans. Though Galathea Bay meets all CRZ-1A criteria, confidential assessments reclassified it as CRZ-1B, seemingly to permit port construction, raising transparency and procedural concerns.

Q4. How does the Ministry’s admission challenge its own committee reports?

Ans. The Ministry acknowledged active turtle nesting and coral presence, contradicting committee findings that denied CRZ-1A classification and exposing flaws in the scientific assessment process.

Q5. What larger governance issue does the case illustrate?

Ans. It highlights inconsistencies between environmental law, decision-making, and scientific evaluation, raising concerns about the credibility of regulatory processes for ecologically sensitive development projects.

Source: TH