PM PANEL PUTS INFLATION BLAME ON GOVT DOORS

19 Feb 2010

PM'S PANEL PUTS INFLATION BLAME ON GOVT'S DOORS

From Our Delhi Bureau

NEW DELHI: The Prime Minister's Economic Council (PMEAC), headed by former Reserve Bank of India (RBI) Governor C Rangarajan, on Friday came out with the bitter truth that the government's monetary policies are actually soaring the painful inflation, advising it to better cut the high budget deficit from the next financial year (from April 1) to bring down prices.

“The government cannot continue with the kind of large revenue and fiscal deficits recorded in the last two years and will have to initiate fiscal consolidation in the coming fiscal year itself to ensure fiscal sustainability and enable greater flexibility in monetary policy calibration for damping inflation,” the council said in a report out a week ahead of the Union Budget to be unveiled in Parliament by Finance Minister Pranab Mukherjee on February 26.

It issued a stern warning that the runaway prices of the food commodities are likely to drive up the headline inflation next fiscal, putting the government and the Reserve bank of India (RBI) under pressure to take policy actions.

"The danger of this spreading to other commodities certainly exists, especially in the backdrop of the strong recovery that the Indian economy has been making since the summer of 2009," the council said, stressing that "policy must remain alive to the danger that a significant transfer of food price inflation to the general price level might occur in 2010-11."

GROWTH UP AND UP: Releasing the council's ‘Review of the Economy-2009-10,’ Dr Rangarajan told a Press conference here that the Indian economy is bouncing back but inflation is a matter of concern. The review predicted India's growth for this fiscal at 7.2 per cent, and later accelerating to 8.2 per cent and 9 per cent respectively over the next two years. 

"Growth may be even higher than 7.2 per cent, driven by strong revival in manufacturing and construction," he said while pointing out that the "critical component” of the inflationary process in the current fiscal derives from primary food and sugar.

He dropped hints of the government reducing money supply to curb inflation, taking advantage of high farm production as he said "the council expects a bounce back in agricultural gross domestic product in the next year and maintenance of the desired trend growth of 4 per cent in 2011-12,"

The high-profile council's recipe tallies with that of RBI Governor Duvvuri Subbarao, who too said last month that monetary policy alone won’t be effective in containing inflation unless Mukherjee withdraws fiscal stimulus measures and narrows the difference between spending and revenue.

The council expects the industrial and service sectors to continue to expand strongly in the next two years and hopes the government's priorities and initiatives on infrastructure would proceed along desired lines. "On this basis, we are making an initial estimate that the economy would grow by 8.2 per cent in 2010-11 and by 9 per cent in 2011-12," said Rangarajan.

He attributed the rising growth rate to strong rebound in the second half of 2009-10, with all signs of strong rebound also in the third and fourth quarters, especially in industry. He said outcome in the farm sector will be also much better than feared earlier, in part due to proactive government measures.

GLOBAL SCENE: Comparing happy recovery in India with that of the developed countries, he said they have come out of recession but it is a weak recovery with downside risks to growth, more so because the financial markets are nervous about fiscal sustainability, worsening budgetary position in advanced economies and speculative pressure on commodity prices, especially the sharp rise in crude oil prices.

The council noted that a sharp fall in investment rate in 2008/09 reversed in 2009/10 with estimated investment rate of 36.2 per cent as against last year's 34.9 per cent and estimated savings rate of 34 per cent as against last year's 32.5 per cent. It predicted both picking up with improvement in domestic conditions and fiscal consolidation by government.

On agriculture front, the council review said: "Damage to Kharif output restricted, Rabi output to be higher than last year." It said wheat output will be almost equal and pulses slightly higher than last year. Though Kharif rice was lower by 12 million tonnes, Rabi rice will be higher than last year. Output of oilseeds, coarse cereals and sugarcane will be lower.

The Government wheat and rice stocks will be comfortable, the council added.

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