The government should cut down on all expenditures not linked to productivity as fiscal measures are more effective than monetary tightening in taming unrelenting inflationary pressures, the country?s chief statistician, TCA Anant, has said. ?Monetary policy is not very effective in handling short-term structural problems. It is more suited to address unanticipated shocks, like those arising from external policy,? he told FE in an interview.
Anant, however, added he was wary of fiscal tightening that reduced public investment. What often tends to happen is that expenditure heads that can be easily controlled see cuts rather than the ones that is likely to impact inflation, he said. ?Fiscal tightening has to be done carefully so that it has an impact on demand, yet not curtail spending on infrastructure. When we seek to contain inflation we should look at things that are relatively unlinked to productivity,? the chief statistician said.
While maintaining that the inflationary concerns would subside by December, Anant said he expected the government?s growth projections to met. ?Even though industrial production has been showing some volatility on a month-on-month basis, I believe that the growth projections will be adhered to,? he said.
In an FE poll of eight senior policymakers and economists on the relative usefulness of fiscal and monetary measures to ease inflationary pressures, a consensus emerged in favor of fiscal tightening.
Pronab Sen, principal advisor at the Planning Commission, cautioned against going back from the accommodative stance on both the fiscal and monetary fronts as the economic growth was yet to gain traction. ?My diagnosis of the situation will remain the same till the consumption and investment gather further traction,? Sen said while responding to FE?s poll questionnaire.
?Sluggish and political nature? of fiscal policy was highlighted by Suman Berry, director-general of Delhi-based think tank NCAER, who came out in support of fiscal tightening in the poll. With key state elections coming up next year, a major concern is whether the Centre would have the political will to step up austerity measures.
The poll results spell good news for the bond markets which received a breather from single-digit headline inflation after five months. The central bank, which has already hiked the key policy rates four times since mid-March, is reviewing the monetary policy again on September 16. Data released by the government on Monday had showed that headline inflation for July had eased to 9.97% from 10.55% in the month before. Global economics research firm Moody?s had recently pointed out that the government should reign in spending to target inflation in short term. The research firm had pointed out that fiscal austerity would slow prices and boost the economy?s longer-term prospects. Subsidies and expenditure under heads of social expenditure should be axed if fiscal tightening is to be done.