Economic Survey: Price rise? The fisc holds the key

The government will have to aim for rapid fiscal consolidation if inflation has to be kept down and the economy has to post robust growth, Economic Survey 2011-12 said on Thursday.
The statement comes a day before finance minister Pranab Mukherjee’s Budget speech. It is possible that the government may announce a roadmap to repair public finances , say analysts. RBI, which left interest rates unchanged on Thursday, also said that fiscal deficit has been adding to inflationary pressure and credible fiscal consolidation will be an important factor in shaping the inflation outlook.
“In the interest of mediumto-long term growth, it is important for us to bring the fiscal deficit down. While an expanded deficit can boost consumption and economic growth, this is medicine akin to antibiotics,” said the survey.
“It is very effective if properly used and in limited doses , but can cause harm if used over a prolonged period. Hence, government’s aim must be to effect rapid fiscal consolidation,” it added.
The government has already said that meeting the fiscal deficit target of 4.6% of GDP for 2011-12 would be a challenge and economists estimate it could end up at around 5.5% of GDP.The central bank has repeatedly called for restoring the health of public finances, which are groaning under the weight of rising spending commitments , higher subsidies and sluggish tax receipts due to the economic slowdown.
The survey reiterated that headline inflation, as measured by the wholesale price index, is expected to ease to 6.5% to 7% and further moderate in the months ahead, barring unexpected shocks. Inflation is hovering around 7% level after being stubbornly high for more than a year on the back of costly vegetables and protein-based items.
“Recent geo-political uncertainties are once again putting pressures on crude oil prices globally. This represents a major risk and challenge and the best course of action would be to persist with regular step-adjustment of energy prices, which will help in reducing incipient structural inflationary pressures and fiscal consolidation efforts,” the survey said.
RBI warned about upside risk to inflation. “However, upside risks to inflation have increased from the recent surge in crude oil prices, fiscal slippage and rupee depreciation. Besides, there continues to be significant suppressed inflation in fuel, fertilizer and power as administered prices do not fully reflect the costs of production ,” it said.
It said that notwithstanding deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future actions on interest rates.
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