Leading industry body ASSOCHAM has called upon the government to manage large fiscal deficit and address supply-side issues to tame inflation rather than tinkering with monetary policy frequently.
As the United States and Europe struggle to get their economies rolling again, India is having the opposite problem figuring out how to keep its revved-up growth engine from generating doggedly high inflation.
The inflation rate accelerated to 8.98% from 8.31% rise, firming expectations of another rate hike by the central bank. Significantly India Asia’s third largest economy is the most active tightened of monetary policy among the Group of 20 leading nations.
The 1.3 trillion dollar economy has boosted consumer demand and spurred manufacturing, car sales, credit growth as well as salaries, stoking price risks and prompting the Reserve Bank of India to tighten restrictions on bank lending and raise interest rates on loans and deposits eight times in the past one year the textbook methods of fighting inflation by tightening the nation’s money supply.
This adds to the risk of stifling economic activity and elevated global crude prices could throw a spanner in the works of the government which budgeted its fuel subsidies at 90 to 92 dollars a barrel. India relies on imports to meet three-quarters of its annual energy needs.
The Associated Chambers of Commerce and Industry of India said that “Inflationary conditions have traditionally been exacerbated by factors like monetary pressures resulting from large budgetary deficits and wage-price linkages.” So a smaller budget deficit would be the best inflation fighting tool rather than racing for more monetary policy intervention.
Mr DS Rawat chamber’s secretary general said that the logistics deficiency unauthorized hoarding speculations and inefficient agro marketing channels too have been major causes of inflation. “Under these circumstances the government faces a greater policy dilemma in bringing down inflationary pressure while safeguarding the growth momentum.”
Mr Rawat appreciated finance minister Mr Pranab Mukherjee’s uncharacteristically blunt assessment of the choices facing the nation for tackling the price rise menace that taming inflation could mean trading off with a much lower growth rate.
Mr Kaushik Basu chief economic advisor to the finance ministry told delegates at an ASSOCHAM meet that April inflation rate could drop below 8%. Government officials say direct and indirect tax collections, merchandise exports and bank credit suggest that the growth momentum persists and the economy may expand as much as 9.25% in the current financial year 2011-2012.
