Lower fiscal deficit would help keep inflation in check

Written by fe Bureau | New Delhi | Updated: Feb 27 2011, 04:29am hrs
Lower fiscal deficit would improve credit availability and monetary policy's effectiveness in controlling inflation, according to the Economic Survey. It said that the debate on trade-off between inflation and growth would be a key policy theme in the near future.

The issue of maintaining an environment where the cost and availability of credit is supportive of growth momentum, while ensuring that inflation falls back to more comfortable target levels, will be at the centre stage of policy consideration in the near term, the Survey said.

Even as monetary policy tools are being used proactively to manage demand and dampen inflationary pressures in the economy, the concurrent consolidation of fiscal deficits will be essential. It is expected to ease the conduct of effective monetary policy in the near future, it said.

The reduced fiscal deficits will permit greater availability of credit to sustain growth, while tighter monetary policy starts to transmit its impact in reducing inflationary pressures, the Survey said.

While acknowledging high inflation as a prime concern, Kaushik Basu, chief economic adviser in the finance ministry, said steady growth over the years raises the inflation levels in a country. He also said that since the country does not have regular data on unemployment, it is difficult to ascertain the impact that a tight monetary policy could have on the employment level.

Basu pointed out that inflation was not merely due to government measure but because of a multitude of factors, global and domestic.

Inflationary pressures are emanating from supply-side constraints, especially in food and other primary articles, as well as the transmission of higher global food, oil, and other commodity prices, it said.

Average headline inflation in April-December 2010- 11 at 9.4% is the highest ever in the decadal average, the Survey said. Basu said India's economic growth, projected at 9% in the next fiscal, could slow down if oil prices go through the roof.

But slowdown in industrial output growth is more in the nature of road bumps than indication of any long-run problem, the Survey said.