Reserve Bank of India deputy governor Subir Gokarn has said the Centre’s fiscal situation is far away from the ideal condition seen in 2007-08 and is making a “significant contribution to inflationary pressure.”
Though the sharp reversal in fiscal condition was a result of the response to the global financial crisis of 2008-09, he said the ideal conditions of high growth and low inflation were present at a time of low fiscal deficit and should be the aim of the policy.
“We are a welfare state at some level and it is almost mandatory for the government to spend to meet its social compact. But some of it is growth enhancing and some is not,” he said in a lecture at the Icfai Foundation for Higher Education here.
“Fiscal policy should rebalance by emphasising more investment spending and less on consumption. As the government withdraws in terms of its contribution to the total demand, it will create space for more investment,” he said.
According to him, the government should aim at zero deficit in consumption and allow any deficit to be present only in investment spending.
Over the last one year, he said the drivers of inflation had changed from food in July 2010 to non-food components in November that year to manufactured goods in January 2011.
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According to Gokarn, the predictable pattern of high growth leading to high inflation was because of supply constraints in the economy. He said the trade-off between inflation management and lower growth applied only to the short-term.
He said deregulation of diesel prices would have only an arithmetical impact on inflation. “From the point of view of overall efficiency of use of energy, prices of individual products should reflect their true cost. So even though there may be a short-term impact on inflation, as these higher prices get reflected in the index, over time it is the right thing.”