India’s key fiscal and currency administrators would have to keep a tight vigil on rising foreign capital inflows and high commodity prices as policy makers grapple with options to manage inflation in a period of global economic uncertainty, the Economic Survey has said.
<b1>“Monetary policy needs to address the inflationary expectations triggered by sub-sectoral price flare-ups arising from mismatches in demand and supply. It also has to manage the stress arising from continued increase in capital flows,” the survey said.
It, however, projected a moderate inflation rate in the coming months as policy measures taken during the course of the year work their way through the system. Despite the hike in petrol and diesel prices, the inflation rate would remain lower at 4.4 per cent during the current fiscal, compared to 5.4 per cent in the previous year, it said.
It also said the behaviour of agricultural prices, including essential consumption items, will be critical, given falling poverty and rapidly rising per capita income.
<b2>“We will continue to depend on enhancement of supplies through higher productivity and efficient supply management… Domestic supply management is critical to stabilising inflation expectations,” it said.
Inflation, measured by the wholesale price index, is currently hovering around 4.5 per cent. Inflation had hit a high of 6.69 per cent in January 2007.
With a series of interest rates hikes in quick succession the Reserve Bank of India (RBI) has quite aggressively tightened the monetary screws. While the government has cut import duty on several items, including cement and edible oils, the RBI has adopted a policy of monetary tightening hiking the cash reserve ratio (CRR) and the repo rate to contain the price line.
The survey said that supply side pressures are likely only in sectors like agriculture that suffer from structural problems, infrastructure sectors still characterised by a monopoly core, heavily dependent on government investment and relatively slow decision making sectors such as urban land. However, global shortages and rising prices of these farm items are eroding the government's ability to meet shortfalls at affordable prices, the document said.