Apart from attempting to control demand, supply side responses will be necessary to bring down inflation

The Economic Survey has warned that the easy monetary policy prevalent in major developed and developing nations by way of stimulus to shore up growth could aggravate inflationary expectations in India.

At a time when the Indian economy is plagued with sticky inflation levels, the Survey said: “The positive effect of continuous policy easing by the major advanced and developing countries could pose a higher risk to inflation expectations and may be considered as an upside risk to inflation forecast.”

“Inflation has eased in almost all major advanced and emerging market economies in the current year,” the Survey said and went on to add that as far as India is concerned, the average wholesale prices-based inflation in 2012 (April-December) moderated to 7.55 per cent from 9.35 per cent in the corresponding period of the previous year and further eased to a three-year low at 6.62 per cent in January this year as compared to 7.23 per cent in the same month last year.

Price spiral

Suggesting ways to contain the price spiral — something that has been frequently talked about and prescribed as a recipe to contain inflation — the Survey said: “Apart from monetary policy attempting to control demand, supply side responses will be necessary to bring down inflation in a sustained way, and ongoing policy initiatives need to be pursued.”

While this may sound contradictory as it hints at hardening interest rates, the Survey goes on to suggest that given the fact that India faces a number of constraints on the supply side, in the short run, curbing demand for commodities moderately to catch up with supply may be an effective tool.

“Benign inflation in global commodity prices, with inflation for energy and non-energy commodities in base line scenario expected to be around (-) 2.6 per cent and (-) 2.0 per cent, respectively, in 2013, will check the inflation of tradable commodities even in India,” it said.

At the same time, the Survey has pointed out that the tight monetary policy being followed by the Reserve Bank for most of the year in the wake of persistent inflationary pressures has contributed to a sharper slowdown of the economy than anticipated, and, therefore, there is some room for further easing of the policy to perk up economic activity.

“There has been some moderation in inflation in the third quarter of 2012-13 and with the expected fiscal consolidation the current macroeconomic situation creates room for a more accommodative monetary policy,” it said.

Moreover, with a significant part of inflation getting generated because of poor supply responses, a further shift in the policy stance of the RBI, coupled with improving access to credit with moderation in its cost, would be desirable, the Survey felt.

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