With just about a month to go for Finance Minister Pranab Mukherjee to present the Budget for 2011-12,Honorary Economic Advisor to the Prime Minister of India Raghuram Rajan said the government must take a hard look at subsidies,particularly petroleum subsidies,pull back on government demand,stop expanding big programmes and definitely not launch any new ones.
This will also take care of inflation from the fiscal side. Subsidies are the biggest item in the Budget. My sense is if you can pass through crude oil prices,restrain food subsidy and do away with fertilizer subsidy,90 per cent of what needs to be done on the expenditure side would be done, Rajan told The Indian Express in an interview.
The Eric J Gleacher Distinguished Service Professor of Finance at the University of Chicagos Booth School of Business,clearly is of the view the government needs to rely more on the fiscal side to control prices. Monetary policy can do only so much to control inflation, he said a day after the Reserve Bank of India hiked both repo and reverse repo rates by 25 basis points.
Arguing against a further hike in key policy rates,he said this would increase the cost of capital for the corporate sector. You dont want interest rates to be raised to such a level that growth is killed, said Rajan. If there is a view that real interest rates would be positive,more deposits would come into the banking system.
While India needs to do a little bit of monetary tightening too,part of the overall rise in inflation is because of rising demand. Maybe,we are reaching limits in our capacity and need to pull back on demand. Lets try and pull back on government growth,which by convention is less efficient,compared with private sector demand, Rajan said.
We have to start passing on the rise in crude oil prices to consumers. The fisc can absorb only some portion of the rise in crude oil prices. And oil prices are not going to come down in a hurry. If crude oil prices go up to $150,can we still take the entire burden on the fisc? Rajan asked.
When asked if food inflation itself was feeding into overall inflation,the PMs economic advisor said it was so central to peoples budget in India. You can see that happen. Higher generalized inflation leads to increase in wages. Salaries of government employees are linked to inflation. It then feeds back into prices resulting in a wage-price spiral, Rajan said.