How the work of two Nobel Prize winners can guide policy in an uncertain world

A lot of people have been puzzled by why something as intuitively obvious as household and business decisions being forward looking should have been discovered anew, and how their models could possibly help cope with the kind of energy crisis of March 2026, when there was a frightening cessation in supply of oil and gas the world over.

That situation called for management of physical supplies with the collapse of global trade, rather than the kind of freely flowing supplies but at suddenly quadrupled prices that were seen in the market for oil in 1973.

With their work, and the supplementary analysis of others, inflationary expectations, and the need for monetary policy to keep them in check, assumed textbook status as a foundational requirement for macroeconomic stability. And that still carries validity although we are in much choppier waters.

The very wide acceptance today of the need for price stability is the best measure of the success of the work of Hall and Woodford, while at the same time the pro-intuitive common sense in that prescription has paradoxically led to questions as to why what they did was so innovative or prize-worthy.

In India, the formal adoption of flexible inflation targeting in 2016, through amendment of the Reserve Bank of India (RBI) Act, and the setting up of a Monetary Policy Committee (MPC) with three external members, has been an outcome of that very widely accepted prescription.

However, if price stability has been achieved in India since then, which it certainly has as compared to the decades preceding, it owes a great deal to the supply-side interventions in the agriculture sector by governments at national and state levels, towards ironing out impediments in the supply of inputs like irrigation water and fertilizer.

Food is a key element in the experience of price inflation in India. It has to be, in a nation where the weight of food is 36.75% in the Consumer Price Index (CPI) newly introduced in 2026, down from 45.86% in the earlier CPI, but still high.

So, although inflation-targeting monetary policy was formalized in 2016, policy towards the agriculture sector has been a close and cooperating partner, by holding down both levels and volatility in the price of food. Clearly, the need is for the executive and the central bank to work as a team, while respecting the jurisdiction of the other.

That teamwork on the price of food was ruptured by the national mandate to sell petrol with a 20% ethanol mix. It has incentivized cultivation of maize and sugarcane from which ethanol is produced, but the supply-side response has not been sufficient to prevent their prices from rising.

Maybe the rising price of sugar is not such a bad thing for India, given the prevalence of diabetes. But maize is a key input going into poultry, with knock-on effects on the price of eggs and chicken. In a country where all but 30% of the population are marginally or seriously deprived of nutritional sufficiency, this is not a good way to go.

The latest CPI inflation reading for September was 5.5% overall, but 7.7% for food. There are other exogenous factors playing into food inflation, including the deficiency (12.6%) of the south-west monsoon, but the ethanol mandate was a self-goal.

On 16 October, sugarcane-sourced ethanol production was banned because of soaring sugar prices. Maize will be forced into the breach. In a year of deficient rainfall, the MPC will have to contend with highly strung inflation expectations, provoked by a policy-induced distortion in the cropping pattern.

Further, sugarcane is a thirsty crop. Its cultivation should be curbed, not increased. Water scarcity in India is widely projected as the country heats up with climate change. That fear of water scarcity, already working to discourage industrial investment, has to be reduced by reversing (smoothly, not suddenly) the ethanol mandate. In today’s terribly uncertain world, it is necessary to restore confidence in the certainty that domestic policy will be coherent on all fronts.

Indira Rajaraman

Prof. Indira Rajaraman holds a PhD in Economics from Cornell University. She was on the economics faculty at the Indian Institute of Management, Bangalore for 18 years, and subsequently RBI Chair Professor at the National Institute of Public Finance and Policy, Delhi. Post-retirement, she was Member of the 13th Finance Commission (2007-2009); and Member for a four-year term (2011-15) of the Central Board of Directors of the Reserve Bank of India. She is on the panel of experts for the Systemic Risk Survey conducted by the RBI for the biannual Financial Stability Report. She has over 70 research publications in peer-reviewed journals and edited volumes and has written a regular column in the Economic Times (2001-04), Business Standard (2010-14) and, currently, Mint (since 2014).She was a member of several official committees that shaped the process of financial and fiscal reform over the last three decades. She was a Member of the Board of Governors of the General Insurance Corporation for a four-year term (1997-2001) and is currently an Independent Director on the Board of Tata Sikorsky Aerospace (TSAL) since 2016. She has been on the Boards of a number of academic institutions, and was Visitor’s Nominee and External Expert for faculty selection in Humanities and Social Sciences at IIT Kanpur (2007-14). She was Non-resident Honorary Distinguished Fellow, Indira Gandhi Institute of Development Research (IGIDR), 2021-25.