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Resource centre on India's rural distress
 
 

It’s the fisc


While monetary policy is an important element of the artillery against inflation — and with the 25 basis point hike, the RBI did part of what it was expected to do to tighten policy — there is the fiscal task too. As Raghuram Rajan, adviser to Prime Minister Manmohan Singh, points out, the Centre must control expenditure, cut subsidies and not start new spending programmes.

Fiscal deficits are large and rising and the UPA has put no restraints on expenditure. It’s now clear that the increase in government expenditure after the financial crisis erred on the side of too much. But with the relaxed attitude of the government and of the National Advisory Council, which seems to suggest new programmes with absolutely no regard for the expenditure they entail, the country could head into a big fiscal mess and high inflation. When it recommends increasing NREGA wages or the right to food, the NAC is not held responsible for side-effects of high deficits such as high inflation and fiscal trouble. It’s for the government alone to accept what is prudent even if this will mean turning down populist proposals. It should now focus on improving implementation of existing schemes and not starting new ones.

Cutting subsidies on food, petroleum and fertilisers may be politically difficult, and invite protests, but sustained inflation is not a politically wise alternative in a democracy where the voter is highly sensitive to price rise. Even with more disinvestment this is not a sustainable path. If oil prices rise to $150 per barrel, the government has to re-think its subsidy policy. The UPA has talked about food stamps, kerosene stamps and a system which targets subsidies better, even if it does choose to provide subsidies. This can cut the total subsidy bill as well as reach the poor better. Inflation control requires a lot more than tightening credit. Fiscal consolidation will be an important element of the solution, and the coming budget must reflect the government’s priority of inflation control by sharply cutting deficits and laying down a path for consolidation. At the same time, through better targeting subsidies, it will ensure that the poorest do not suffer.