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Rbi can't control WPI PDF Print E-mail
Friday, 09 March 2012 00:00
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Crisil points out all levers are with FM

Though all eyes are on RBI’s credit policy, to see what it does to stimulate investment while controlling inflation(!), in reality RBI has little control over either in today’s circumstances. For one, as RBI has been quite vocal about in recent weeks, it has no option but to hike interest rates to control demand if the government doesn’t control its expenditure. In the post-crisis period (2008-09 to 2010-11), the fiscal deficit averaged 5.8% of GDP as compared to the 3% target set by the FRBM Act. In all the periods of high inflation over the past few years, fiscal deficits have been over 5% of GDP, a recent Crisil report points out. Between 2004-05 and 2010-11, according to Crisil, consumption expenditure of the government rose by R5,30,000 crore as compared to just R1,80,000 crore for capital formation. In other words, government expenditure is a lot more focused on boosting consumption demand than it is on raising the economy’s productive capacity.

While the proportion of the population covered by MGNREGA continues to be small, it has resulted in a sharp hike in farm wages as migrant labour has reduced; the Sixth Pay Commission did the same for PSU wages—in real terms, while they rose by 11.8% per annum between 2006-07 and 2010-11, they had risen by just 1.6% per annum in the previous four years.

If demand pressures have risen at one end, delays in government clearances and a dampening of investor sentiment due to unfavourable government policy has ensured productive capacity has not kept pace with this—a sharp fall in public savings (this goes beyond the fiscal deficit and takes into account PSUs which, like the oil sector ones, are bearing losses of R1 lakh crore due to subsidies) has contributed to this by way of reduced availability of capital. In the case of agriculture, where inflation has been the highest, government policy of spending on subsidies instead of investment has ensured productivity has hardly risen. In other words, while RBI can at best affect outcomes marginally, and that too after the event, all the real levers lie with the government.

 

Last Updated ( Sunday, 11 March 2012 11:55 )
 

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