8/7/2019 Will Budget contain inflation damage

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Will Budget contain inflation damage?

OFFICIAL INACTION NOTWITHSTANDING, GROWTH MAY STILL

HIT 9%

Indicus Analytics

Published: ET

THE RESERVE BANK OF INDIA (RBI) RAISED rates moderately again

in January, as expected. While doing so, it also raised the inflation estimate

for March, again, as expected. To some, the hike was too feeble, a sign that

the RBI is being too cautious, quite different from earlier years when rate

hikes were universally being decried. Given that inflationary pressures are

very strong, not just in India but globally, especially when it comes to food

and fuel, can we expect the RBI to come down stronger in the months

ahead? We do not anticipate this happening at this juncture.

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As we had flagged last May, this is a new RBI, and the ‘new RBI will do

the bare minimum of what it is expected to on the inflation front’.

Of course, the RBI can easily push the rates up and take all the blame for 

curbing the great growth story. Right now, growth is still looking good. The

IMF has raised global growth estimates for this year — this will augur wellfor India too. Though the IMF has set India’s growth lower at 8% in 2011-

12, like the government, we continue to expect a 9% growth in 2011-12 as a

very achievable target. There are, of course, downside risks and inflation

continues to be the chief one.

Yet, isn’t it true that the major push for this inflation surge has come from

government policy that has paid little heed to changing the fundamentals, at

removing bottlenecks that plague the system at every step? To take just one

example, subsidies on kerosene, more than half of which is siphoned off,

cannot be removed. The minister says that it is ‘politically infeasible’. The

question remains: is it really politically infeasible to target the subsidies

 better? With crude oil prices heading upwards this year, it is even more

crucial to address this issue — more delay will cost the economy. Look at

the global trend in food prices and they are up again this year. How does the

government plan to cushion the poor from this?

Why are we always caught up in this cycle that expects rate hikes to stop

the economy from overheating rather than pushing for unshackling theexisting production and distribution systems that will set the whole economy

on a higher growth and lower inflation path? All eyes are on the Budget

now, to see what roadmap the government will put in on deficits, the aim

should be to work towards growth without the stoking inflation.

With large-ticket expenditure plans of the last few years pushing the fiscal

deficit up, will these plans be curbed? Or, better still, if the expenditure

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cannot be reduced, as being politically infeasible, can we have structural

changes, simple ones like changing the scope for NREGA, for instance?

With the NREGA wages now linked to inflation, it is important to revisit the

scheme and the jobs that go with it, allow the money to be paid out for 

training and raising skills, for instance.

As we see it now, our expectation is 9.2% growth in 2011-12 with current

levels of inflation through the year and slightly higher interest rate regime.

We expect that industry will take this present moderate rate hike path in

stride and services will power growth with transport, storage and

communications in the lead.

Of course, things could go sour if inflation soars and higher rate hikes

kick in, international developments hit trade, crude and financial markets,

erratic weather hits agri output etc. In the years ahead, we can have a

combination of high growth and low inflation, but a lot depends on how the

fisc and food management plays out.

Indicus Analytics

Contact Sumita Kale (sumita@indicus.net) for comments.