Money & Banking

Poor monsoon seen fuelling inflation

Vinson Kurian Thiruvananthapuram | Updated on March 12, 2018 Published on August 14, 2012

RBI Chief sees fall in investments a macroeconomic concern

Deficit monsoon and poor rains in parts of country could fan inflation in the country, according to Reserve Bank Governor D. Subbarao.

Delivering a lecture here hosted by the Kerala Planning Board last evening, he said that the cereal buffer stocks were reassuring.

But the country may face a crisis on the pulses and oilseeds front, if rainfall pattern is any indication.

This can raise inflation expectations as people generally tend to expect inflationary trends to feed themselves. Neither has the supply response been adequate.

On the problems facing the macroeconomy, he said that decline in investments was a major area of concern.

The historically high current account deficit (CAD) is borne out of the adverse twin (fiscal and revenue) deficit combine. Borrowings are used to meet current spending.

The government often opts for the soft option of taxing more rather than controlling spending. Sustainable gains can only flow from expenditure compression.

Here is where the quality of fiscal adjustment assumes importance. “We cannot avoid spending in must items such as defence, salaries and subsidy, for instance.”

But it is easy to cut down on capital/productive expenditure. This is why fiscal consolidation has become quintessentially a political issue.

Subbarao made a call to enforce Fiscal Responsibility and Budget Management Act. Quality of financial adjustment would help carry forward fiscal consolidation.

On capital flows, he said inflow has been too much or too little for purposes of financing CAD. They have never matched the ideal demand/supply situation. Even when the inflows were available, they have been volatile at best. So much so, the G20 meeting has had to devote itself to discussing the issue of currency wars. This is because too much flow weakens the home currency while too little does exactly the reverse. Depreciation can in turn cause instability and further outgo of capital.

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Published on August 14, 2012
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