The Hindu Business Line : ‘Inflation likely to moderate’

New Delhi, Feb 28 Projecting a moderation in inflation levels over the medium term, the Economic Survey has, however, struck a cautionary note in the wake of surging foreign inflows and global commodity price movement.

“Overall inflation is likely to remain moderate in the coming months, as the policy measures taken during the course of the year work their way through the system,” Survey noted. It said the overall inflation rate is projected to decline from 5.6 per cent in 2006-07 to 4.1 per cent in 2007-08.

The Survey noted that there was a supply-side pressure in the farm and infrastructure sectors on account of structural problems and said that the Reserve Bank of India needed to address inflationary expectations triggered by “sub-sectoral price flare-ups” that may arise from demand-supply mismatches.

“Monetary policy also has to manage the stress arising from continued increase in capital flows and consequential changes in exchange rate, exchange reserves, and liquidity... Domestic supply management is, therefore, critical to stabilise inflation expectations, moderating pressure for upward revision of wages and prices, and containing pressure for cost-push inflation,” the report said.

Rising global prices are having more pronounced impact on domestic prices, the Survey noted. “The supply side pressures are likely only in sectors such as agriculture that suffer from structural problems, infrastructure sectors still characterised by a monopoly core, heavily dependent on government investment and relatively slow decision making sectors such as urban land,” the Survey said.

It said the reduction in tariffs on non-agricultural products had played an important role in bringing Indian inflation rate in line with the global rate and proposed a continuation of the trend. As far as agriculture items are concerned, prices of essential and other items will play a critical role as poverty has come down and per capita income has risen, the Survey said.

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