Turn focus to consumer pricing by Ila Patnaik

The major problem that the media is addressing these days is the consumer price index. This is going to be discussed during the budget session. The focus has to turn to consumer pricing. People also face policy problems because of their wage negotiations and inflationary expectations. Consumer prices escalate by 5 percent every month and that is the first issue that needs to be addressed and attended as of now. We are concerned about the wholesale price index and that is the reason we are concerned about the inflation going up or down whereas it has been at acceptable levels for quite a while. The inflation today has come to such a level that it is not really viable to figure out a quick solution for it. It should have been addressed right away in the year 2006-2007 when we first started witnessing it largely.

The government has been addressing the inflation problem in a wrong way. Every time whenever there has been a hike in the prices of either oil, cereals or onions, what the government resorts to do is to ban their export but no long term permanent solution is figured out. So there are two issues that need to be addressed as of now, the first being too much uneasy monitory and fiscal policies consolidation that were executed which commensurate to the demand side of the inflation coin and the other was reforms to be introduced in the field of agriculture. Reforms in the agricultural sector could be a long term permanent solution for the problem. If agricultural sector witnesses new technological advances then only can the inflation of the food commodities be curtailed.

One of the major inflation hits are the food prices. These can alter as they are demand and supply driven. If one ignores the food pricing as an issue in the monitory control measures and policies, then inflation can persist as a longer lasting problem as inflationary expectations are high. If the RBI and other policy makers don’t do ample fiscal consolidation and monitory contractions inflation cannot be ruled out. Besides, the demand should be curtailed as much as required.

It is true that growth in the short run suffers greatly with low interest rates but the long run works well with low and stable inflation rate. Higher growth can be achieved if both household and businesses can make their investment plans which could happen at high degrees only if they both are acquainted with the inflation rates. If inflation rates escalate to 25-30 percent then it would not encourage high growth. Therefore the bond between inflation and growth holds good for short terms. For higher growth we need a low and stable inflation rate and therefore it gets important to title policies now.

It is high time now to give a signal that India is worried about its fiscal consolidation. India needs to deal with the problem of subsidies as their rates are incrementing alarmingly. India is plagued with both fiscal deficit and high inflation.These two factors would always hamper India’s growth. The government needs to curtail subsidies in different sectors. The kerosene subsidy should be curtailed in the backdrop of its adulteration and misuse in the first place. There could be a lot of money that could be saved from curtailing the subsidies which could be channelised elsewhere. Unless these steps are executed the demand pressures on the economy would not come down and the upcoming budget can play a role in addressing them.

By reducing the demand pressures in the economy, consolidating fiscal deficits and reducing subsidies the budget can help.

(Ila Patnaik is Senior Fellow at the National Institute of Public Finance and Policy)