Government’s general tendency all along has been to blame extraneous factors for whatever goes wrong in macro-economic management. Headline inflation has remained at close to 10 per cent for months as something intractable while the food price inflation since 2008-09 could, it is defensively argued, only be overcome over the long term with removal of supply constraints. Till then, the people have simply to grin and bear the burden. Over the last three years, Government may have boosted demand with pay hikes for government employees and large increases in MSP for farmers. But, little was done in supply management to ensure affordable prices for the vast majority of the population. The excessive rise in cereal prices, especially rice, from mid-2008 was the initial trigger for not only the high food price inflation along with growing demands for diversified products, but also for the steady uptrend in general price level now stubbornly close to double digit for almost a year now.

Monetary policy is the only tool effectively available to anchor inflation, well used so far but with no effect. Fiscal policy has been far from being helpful to complement the monetary policy though the Finance Minister speaks at intervals of need for better coordination of fiscal and monetary policies. Instead insidious pressures have been brought on RBI for a pause in rate hikes from the North Block and the Planning Commission while we are made to believe that RBI enjoys monetary policy independence. All the business chambers have no doubt performed in warning the central bank though they have little compunction in passing on costs to the consumer. That further increases in key rates would be counter-productive at this time of pronounced slowdown in industry – as if RBI jacking up repo rates is the major factor for it – has been hammered by the Chief Economic Adviser, Dr Kaushik Basu, whose own view is that letting multinationals into retail FDI sector would bring down inflation.

The Deputy Chairman of Planning Commission Mr Montek Singh Ahluwalia shares the distaste for tweaking of policy rates, his assumption being that prices which go up should come down on their own after some time and certainly by December, one would certainly begin to see the magic effect of this year’s good monsoon. That Government is bereft of quick actionable ideas to secure a modicum of price stability and equally unwilling for strong market intervention to check middlemen abuse is by now well-established. On the same platform where the Finance Minister dismissed inflation as relatively a side issue in relation to GDP growth, the slowing of which has disappointed him, Dr .C. Rangarajan, heading the PM’s Economic Advisory Council, struck a distinctly different note.

He strongly defended the current phase of monetary tightening by RBI, especially in the context of lack of measures, on the fiscal side, to curb demand and contain subsidies though a hike in diesel prices was warranted. Growth moderation in growth had nothing to do with the rate hikes, according to him, and there had been no decline in credit offtake. The more relevant factors must be found elsewhere including the “policy paralysis”, corruption scandals, and land acquisition and related problems creating uncertainties for fresh investments. With inflation remaining way above the comfort level of central bank (4-5 per dent), Dr Rangarajan points out, “it becomes absolutely essential for the central bank to act, with its primary responsibility to contain inflation”. He however believes that inflation will start declining from December. “We can see seasonal decline in November and December. It is expected to come down to 7 per cent by March-end.” As a third policy tool (besides fiscal and monetary), he asked for more foodgrain stocks to be released in the open market.

Government is now reconciled to growth at about 8 per cent. IMF projects 7.8 per cent in 2011-12 and 7.5 per cent next year and the World Bank estimate is “7-8 per cent in the next two years” – and also Mr Mukherjee acknowledged difficulty in meeting the fiscal deficit target of 4.6 per cent in the current year. Apart from global oil prices derailing the planned consolidation, Government has cited monetary tightening and global uncertainties which have hindered new private investments. Equally, Government has been unable to energise public investment on infrastructure so as to lessen the bottlenecks that afflict current output so glaringly seen in the power sector. Government’s additional borrowing is an index of expenditure getting out of the budget lines.

The World Bank attributes the growth slowdown to global uncertainties, policies intended to fight still-high inflation, and the base effect of the strong agricultural rebound in FY2010-11. In view of slow growth in core OECD countries, it calls for strengthening the domestic drivers for growth by way of important structural reforms, and further measures toward fiscal consolidation and reorienting government spending toward investment and growth. Cautiously, the Bank suggests that in view of high risks from the uncertain international environment, “policymakers would do well in reviewing crisis preparedness at this time”.

The latest food price surge to 10.60 per cent in the week ended October 8 is a pointer of continuing inflationary pressures and manufactured products was also as high as 7.69 per cent in September with the overall WPI at 9.72 per cent. Tackling inflation remains a continuing challenge for the rest of the fiscal year and meanwhile, MSP will go up for the rabi harvest, oil prices would remain high, whatever the international prices, and power tariff revisions.

According to inflation analysis by Mr Deepak Mohanty, Executive Director of RBI, while inflation is expected to “moderate towards the later part of the year”, fiscal policy needs to be supportive in containing aggregate demand. Structural supply constraints, particularly in agriculture, need to be addressed so that these do not become binding constraints in the long run, hampering the task of inflation management, he said. On the agricultural front, another record foodgrain production over the 241 million tonnes in 2010-11 is anticipated by Agriculture Minister Mr Sharad Pawar, basing his estimates on kharif output of rice, “ at an all-time high”, and cotton and oil seeds. But the country has to produce more for food and nutrition security and invest more for modernization and productivity improvements.

The sharp depreciation of the rupee (down to about Rs.50 to the dollar), compounding the inflationary pressures is an additional policy challenge which RBI would address in its second quarter (mid-year) monetary policy review on October 25, along with several structural issues involving the banking system, credit soundness, buffers to meet any shocks from the ongoing global financial market instability as well as financial inclusion. The macro-economic situation in all its aspects has been reviewed already by the Governor Dr Subbarao with Finance Minister Mr Mukherjee ahead of the policy announcement. (IPA Service)