Three-point agenda to counter inflation - Fiscal discipline, productivity improvement & fuel price reforms - CRISIL Research

March 05, 2012

Inflation, by any measure, has been high in the last six years. WPI (Wholesale Price Index) inflation consistently surpassed the RBI’s comfort threshold of 5 per cent in 51 out of the 70 months between April 2006 and January 2012. The annual WPI inflation rose to 6.9 per cent during this period, from 4.7 per cent in the preceding five years. Average annual CPI (Consumer Price Index) inflation rose to 9 per cent from 4.1 per cent, during the same period.

CRISIL Research has identified fiscal discipline, productivity improvement and petroleum pricing reforms as the three key steps to pull the Indian economy out of the high-inflation trap.

1. To reduce and stabilise inflation, the Union Budget 2012-13 needs to lay out a credible roadmap to cut the fiscal deficit-GDP ratio by restraining consumption expenditure. Creating fiscal space through expenditure reforms will enable the government to invest in agriculture and infrastructure, where supply is deficient,

2. Alignment of wages to productivity improvements will check inflationary pressures. “Since MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) wages are indexed to inflation, ensuring MGNREGS projects result in improved irrigation and rural infrastructure is vital. In addition, robust mechanisms for monitoring outcomes of these projects are critical,

3. The current pricing regime for petroleum fuels not only increases subsidy burden but also makes retail price adjustments sharp and unpredictable. Aligning international and domestic prices of petroleum fuels will reduce the surprise element of abrupt changes in administered prices. This will not only cut the subsidy burden but also rationalise demand for these products,

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