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Moderation in agricultural support price and raising energy prices to market levels will help in the fight against inflation, according to Reserve Bank of India Governor Raghuram Rajan.
“Good fiscal control will help us in our fight against inflation. So will moderation in agricultural support price inflation, which will ensure that these prices only provide a baseline level of support when the farmer is in difficulty, without displacing market prices,” he said at the tenth DR Gadgil Memorial Lecture.
Accurate market prices, together with good dissemination of data on sowing patterns, can do a far better job than support prices in directing agricultural production to where it is most valuable and needed. The RBI chief observed that the Government will need to continue on the path of fiscal consolidation, constantly improving the sustainability and quality of fiscal adjustment.
“It is very important that we spend money on needed public investment, even while reducing misdirected subsidies and entitlements.
Raising energy prices to market levels will also lead to lower inflation over the medium term, the horizon over which the RBI is trying to contain inflation.
Will curb consumption“The reason is that higher prices will reduce excessive consumption, reduce subsidies and fiscal deficits, and incentivise investment and competition, even while allowing prices to be determined by an increasingly stable and plentifully supplied global market for energy.
“The consequences of inappropriate or inadequate price adjustments will be that the Reserve Bank will have to bear more of the burden in combating inflation,” said Rajan.
While growth is stabilising on the back of a good harvest, strengthening exports, and some early signs of resumption of large stalled projects, the RBI Governorsaid it is still very weak.
“We have to work to ensure macroeconomic stability, which means strengthening growth, especially through investment, maintaining a moderate current account deficit, achieving a fiscal deficit consistent with the Government’s fiscal roadmap, and reducing inflation,” he said.
According to the Central Statistics Office, the growth in GDP in 2013-14 is estimated at 4.9 per cent compared with 4.5 per cent in 2012-13.
According to latest estimates, in the April-November 2013 period, the Index of Industrial Production registered a de-growth of 2.2 per cent (against a de-growth of 1.6 per cent in the year-ago period).
Rajan observed that the Government has to be commended for its efforts to revive growth, narrow the current account deficit, and meet fiscal targets.
“I have no doubt that the fiscal deficit for 2013-14 will be close to, or below, the Finance Minister’s red line (of 4.8 per cent of GDP),” said the Governor.
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