The government needs to play greater role in taming inflation by reining in spending, as the Reserve Bank's tightening of its policy rates will have little impact on checking price rise, global research firm Moody's said today.
"India is facing its worst inflation problem in a decade, and since the central bank can do little in the short run, the government must play a greater role in addressing it, Moody's Analytics said.
"The problem cannot be tamed by simply raising interest rates to slow monetary growth," it added.
Moody's said growth of bank credit and money supply were sluggish in May at 18.8 per cent and 15.1 per cent, year-on- year, but surging prices of food and imports saw consumer inflation reach 13.9 per cent during the month.
It said although the government has taken steps to divest stake in public sector undertakings (PSUs) and cut oil subsidies, it needs to reign in spending and borrowing because the combined central and state deficit is close to 10 per cent of the GDP, total economic output.
The research firm added that fiscal austerity would slow prices and boost the economy's longer-term prospects.
"With economic growth on a solid footing, inflation spiking, and liquidity in the banking system short, there is little excuse for not taking aggressive action to quickly reduce the budget deficit," Moody's said.
It said that with key state elections coming up there was a major question over whether the government would have the political will to step up austerity measures.
Moody's added, however, that with business confidence revived and firms looking to expand, it should set aside concerns about upsetting coalition members and tighten its fiscal affairs.
