Finance minister P Chidambaram and Reserve Bank of India governor Raghuram Rajan on Wednesday affirmed their resolve to combat intractable inflation, even as the minister said the monetary policy was a blunt instrument to contain it.
Tacitly acknowledging that persistently high inflation was the main reason behind the recent electoral reverses suffered by the Congress party, Chidambaram pitched for structural reforms to ease supply of food items and exhorted states to adopt a proactive role in this regard.
The minister said inflation control was ?one of the priorities? of the government, but said on the very top of its agenda was fiscal consolidation.
The minister?s assertion came a day after global rating agency Fitch said the ruling party?s recent electoral debacle increased the likelihood of political pressure to limit the Centre?s planned expenditure cutbacks.
Rajan, however, cautioned that not all measures to reduce fiscal deficit were of ?the highest quality,? alluding to planned reductions in capital spending and inadequate controls on revenue expenditure like subsidies.
Standard & Poor?s said on Wednesday that India?s sovereign rating may come under pressure if the elections next year produce a hung parliament or one unable to push through reforms. S&P already has a ?negative? outlook on India?s sovereign rating (BBB-) and any downgrade would accord the country?s debt ?junk? status.
Speaking at the Delhi Economic Conclave 2013 on ?The Agenda for the Next Five Years,? the RBI governor said: ?No single data or point or number will determine our next move, but our effort is firmly on controlling inflation.? The central bank, which has raised interest rates by 0.25% each in September and October, will hold its next policy meeting on December 18.
As the economy is at a crossroads and seemed overheated, the governor exhorted the government not to postpone passage of key economic bills, as he saw no guarantee that General Elections 2014 would produce a stabler dispensation capable of pushing these reforms.
Rajan said the central bank would take more steps in the weeks ahead to increase liquidity in the government securities (G-secs) market and reiterated that India was better prepared for the US Federal Reserve tapering its stimulus programme. In the next few days, the central bank is expected to announce steps aimed at making it more expensive for willful defaulters to borrow.
Rajan said the economic growth was stabilising, adding that some glimmers of stronger growth were visible. He saw the clearances given to projects would reflect on the investment scenario in the second half of this fiscal, but remained unsure on whether the economy has bottomed out at this point.
Expressing happiness that the current account deficit narrowed to $5.15 billion or 1.2% of GDP in the September quarter, Rajan said the reduction was in good measure on account of suppressed gold imports, which though ?necessary in the short run, is not desirable over the medium term.? He said the CAD would be below 3% of the GDP this year as against 4.8% last year.
?A stable government post-elections cannot be taken for granted… It would be dangerous for parties to postpone necessary legislation with the idea of passing the legislation post-election. Post-election politics may become even more challenging for whoever assumes power,? he said. ?It will benefit the economy if Parliament passes key bills and if current authorities take action to improve growth and fiscal health, including raising diesel prices to market level and eliminating other poorly targeted subsidies,? the governor said.
Chidambaram ruled out any reduction in minimum support prices for farm produce or rural wages under the MNREGA, but stressed the need to ?deal wisely with harvesting and marketing and deal strictly with hoarding and profiteering.?
India?s WPI inflation stood at 7% in October, while CPI inflation was 10.09%. The CPI inflation data for November will be released on Thursday, while WPI data will be out on Monday. According to analysts, inflation ? as gauged by both indices- may not have seen a respite in November.
