Inflation to Moderate Further in 2012 Renewed Focus on Supply Side Measures Essential for Price Stability – Economic Survey.

Press Information Bureau

Government of India

Ministry of Finance

15-March-2012 12:32 IST

Inflation to Moderate Further in 2012

Renewed Focus on Supply Side Measures Essential for Price Stability – Economic Survey

Wholesale Price Index (WPI) which remained persistently high throughout 2011 due to increasing global commodity prices and high crude prices has started showing signs of moderation and it is expected to touch 6.5 to 7 percent by March 2012. It may further moderate during 2012-13 due to tightening of monetary policy and other measures put in place by the Government. Taking stock of the price situation, Economic Survey 2011-12 has observed that in the current financial year the gap between WPI and CPI inflation has significantly narrowed due to drastic fall in food inflation. CPI-IW inflation, after remaining in single digit from August 2010 to August 2011, briefly touched double digits at 10.1 percent in September 2011 but came down to 6.5 percent in December 2011.

The Survey says that the major drivers of food inflation during the current financial year were milk, eggs/meat/fish, gram and edible oils. WPI food inflation (weight 24.31 percent) has significantly dropped from 20.2 percent in February 2010 to 1.6 percent in January 2012 mainly on the back of seasonal fall in fruits & vegetables prices and good harvest leading to lower inflation in cereals

The Survey comments that the objective of monetary policy during 2011-12 has been to rein in inflation and contain inflationary expectations. With supply side factors feeding into food inflation and an uncertain economic scenario in advanced countries, the task of monetary policy calibration has been particularly challenging.

Liquidity conditions have generally remained in deficit during 2011-12. However, the RBI has addressed liquidity concerns via the use of its standard tools. The monetary market has, in general, remained orderly during 2011-12 with the rates in collateralised segments moving in tandem with the call rate, but generally remaining below it.

The Survey suggests that there is a need to examine the linkages and trade-offs between policy rate changes and inflation in the Indian context, for better calibration of monetary policy. There is also scope to further sharpen monetary policy and macro prudential tools to deal with asset price bubbles in the real estate and stock markets and the risks associated with these, which carry implications for the real economy.

Commenting on the outlook in the area of price management the Survey says that Monetary policy remained focussed on controlling inflation and anchoring inflationary expectations, which has slowed growth. These effects, coupled with a favourable base effect in prices and continued global slowdown, are expected to moderate inflation to around 6.5 to 7.0 percent by March and further moderate in the months ahead, barring unexpected shocks, such as oil prices in international markets.

The Survey observes “Looking at, vigilance is called for in getting back to a low inflation/sustained high growth path in India, by renewed focus on supply side measures and include fiscal consolidation, including stepped up regular adjustments in domestic energy prices.” It says that high level of food stocks and producers responses to higher protein and other food prices should help to maintain overall price stability in the country.

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