It takes two to tangle
The RBI can't check inflation alone. It needs active assistance from the government.Updated: Jan 26, 2012 22:06 IST
The Reserve Bank of India is still waiting to unwind its tight money policy. Wednesday's reduction in the ratio of cash banks have to keep aside should inject a shot of liquidity, but Governor Duvvuri Subbarao is hesitant to pull out the stops after raising interest rates by 3.75 percentage points since March 2010. Inflation could yet get out of hand, the central banker figures, if global oil prices do not soften; if food prices refuse to subside because of a weak supply of proteins; if suppressed energy prices at home are allowed to rise; and most damningly, if the fiscal deficit balloons. Principally, the central bank is worried about prices and what the government is not doing to tame them. Decisions on increasing administered energy prices will raise the price line in the immediate future, but can tease suppressed inflation out of the system. Fiscal rectitude can help steer demand from a bloated administration to productive investments by companies and households. Fixing supply bottlenecks in agriculture and infrastructure, likewise, can ease structural inflation. These are all oft-repeated suggestions by the central bank to the government.
Mr Subbarao has, with candour unusual in central bankers, called for restraint in government spending. Key deficit indicators were up in April-November 2011 from the year-ago period, even after taking out the windfall of spectrum sale receipts. Beyond the budgeted estimate of Rs 417,000 crore, the government in two tranches announced extra borrowings of Rs 93,000 crore. "If the increase in government borrowing already announced is an indication, the gross fiscal deficit for 2011-12 will overshoot the budget estimate substantially. At the current juncture when there is a need to boost private investment, the increase in fiscal deficit could potentially crowd out credit to the private sector. Moreover, slippage in the fiscal deficit has been adding to inflationary pressures and it continues to be a risk for inflation." These are strong words from the RBI.
The government is committed to bringing down the fiscal deficit by half a percentage point successively from 5.1% in 2010-11 to 3.5% in 2013-14. These yardsticks are lower than what the country's financial ombudsman, the 13th Finance Commission, has suggested, which would result in a fiscal deficit of 3% by 2013-14. The government's self-imposed target, in itself, looks elusive; the actual fiscal deficit in April-November 2011 was 85% of the budgeted 4.6%. Subsidies on food, fuel and fertilisers, budgeted at 1.5% of the gross domestic product in the current financial year, are on current indications likely to overshoot the target by a percentage point of GDP. However, a government facing elections in critical states that throw up populist allies will find it difficult to resist demands for preserving existing subsidies as well as announcing new ones like the right to food.
First Published: Jan 26, 2012 22:03 IST