Easing measures by developed nations may worsen inflation

Written by fe Bureau | New Delhi | Updated: Feb 28 2013, 10:47am hrs
The loose monetary policies adopted by developed countries, including the US, to stimulate growth can potentially worsen the inflationary pressure in the Indian economy, according to the Economic Survey. However, with a moderation in domestic non-food manufacturing inflation and global commodity prices, headline inflation may slow to 6.2-6.6% by March.

The positive effect of continuous policy easing by the major advanced and developing countries could pose a higher risk to inflation expectations and may be considered as an upside risk to inflation forecast, said the survey. Central banks across the US, Europe and Japan have, in the recent past, eased their monetary policies to revive faltering growth.

Noting that tight monetary policy by the RBI in the face of persistent inflationary pressures has contributed to a sharper slowdown of the economy than anticipated, the survey said there is still room for further easing of the policy to perk up economic activity.

The average wholesale prices-based inflation during April-December eased to 7.55% from 9.35% a year before. Inflation further moderated to a three-year low of 6.62% in January, compared with 7.23% in the year-ago period.

Benign inflation in global commodity prices, with inflation for energy and non-energy commodities in base line scenario expected to be around (-) 2.6% and (-) 2.0%respectively in 2013, will check the inflation of trade-able commodities even in India, the survey said.

According to the survey, the government will fight inflation by reducing the fiscal impetus to demand as well as by focusing on incentivising food production through measures other than price supports.

Given the higher weightage to food in consumer price indices (CPI), CPI inflation has remained close to double digits. Unlike the previous year, when food inflation was mainly driven by higher protein food prices, this year the pressure has been coming mainly from cereals, the survey notes. The increase of 45-50 paise in diesel price each month is also fueling the prices of essential commodities.

The survey has called for widening of the tax base, and prioritisation of expenditure as key ingredients of a credible medium term fiscal consolidation plan.