The remedies to fix the economy, which is in a bind with slackening growth and elevated inflation, lie with the Government. This view was expressed by the members of a Reserve Bank of India panel on Monetary Policy.
All seven members of the Technical Advisory Committee (TAC) on Monetary Policy, which is headed by RBI Governor D. Subbarao, felt that with the monsoon failure, food prices might go up significantly.
“Wage pressures remain significant, particularly in rural areas. Moreover, structural problems are keeping non-core inflation high.
“Additionally, inflation concerns stem from suppressed inflation and tightening supply bottlenecks in infrastructure,” according to the minutes of the TAC meeting released by the RBI.
Policy rate
Of the seven external members, five suggested that the Reserve Bank should not change the policy rate. They felt that given the fiscal dominance, double-digit consumer price inflation and no realistic expectation of credible action from the Government, the Reserve Bank needs to focus on tempering inflation expectations.
In its first quarter review of monetary policy, conducted on July 31, the RBI kept the policy interest rate unchanged as the headline wholesale price index (WPI) based inflation has remained sticky, above 7 per cent.
Supply-side pressures
On domestic macroeconomic front, TAC members felt that the current situation is by far the most difficult in the last several years. Infrastructural bottlenecks in power, coal, and transport seem to have worsened, causing serious supply side pressures.
“Due to weak monsoon, there could be a shortfall in the output of the agricultural sector. The members felt that there is growing evidence of slowdown of domestic growth,” as per the minutes of the meeting, which was held on July 25.
Fiscal situation
On the fiscal front, many Members apprehended that there could be a slippage in the fiscal deficit (Budget estimate: 5.1 per cent) in 2012-13. According to some Members, diesel price revision to contain subsidies looks very difficult due to the looming drought situation.