The government should increase production of food items to increase supply and reduce food inflation, Economic Survey 2008-09 said on Thursday. It also asked for calibrated absorption of excess liquidity in the market to avoid the return to inflationary trend.
?Though agricultural imports by India are limited, the constraints in the global agricultural production might exacerbate the supply side concerns in India. There is need to address these concerns, particularly in the medium term through productivity gains and efficient supply management. The continued food inflation though moderating of late, could undermine inclusive growth, in particular, the efforts to combat poverty,? the survey stated.
The fiscal and monetary measures taken by the government and Reserve Bank of India have brought down inflation to 0.8% by end-March 2009 from nearly 13% in the middle of 2008. However, food price inflation was still around 7%. Inflation stood at -1.3% for the week ended June 20, while food prices continued to rise.
In order to bring down inflation from around 13%, RBI had tightened the supply of funds in the banking system by raising cash reserve ratio (CRR) to 9%, repo rate to 9%. However, the outbreak of financial turmoil in the global market, the central bank had to allow wider access to money to increase demand in the domestic economy. Therefore, it pulled CRR down to 5%, repo rate to 4.75% and reverse repo rate to 3.25% in different tranches among other measures, releasing more than Rs 4,00,000 crore into the system.
Such a stance could take the economy back to the inflationary route. ?The effort to maintain ample liquidity in the system, as some would argue, might be sowing the seeds of the next inflationary cycle. It would be important, therefore, to ensure that once economic growth picks up sufficient momentum, the excess liquidity is rolled back in an orderly manner.?