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A few days after Congress President Sonia Gandhi blamed surging prices for the drubbing faced by the Congress in elections to four states, Finance Minister P Chidambaram on Wednesday tried to pass some of the blame to state governments and admitted it had affected the central government.
“It is common knowledge that the government of the day will pay a price for high inflation, especially if inflation persists over a long period of time,” he said.
Inaugurating the Delhi Economics Conclave, Chidambaram said state governments are at fault for not dealing with hoarding. He said powers of notification and enforcement under the Agricultural Produce Markets Act and Essential Commodities Act are with state governments, but they don’t take action.
“It is necessary to highlight the inaction of the state governments in this, even while accepting that the central government must do all it can, within its powers, to moderate inflation,” he added.
Inflation is mainly driven by high food prices, especially prices of fruits, vegetables, meat, fish, eggs and milk. Sometimes, pulses and edible oils also witness sharp spikes in prices.
The Congress faced a rout in four Assembly elections. It could neither retain Rajasthan and Delhi, nor wrest Madhya Pradesh and Chhattisgarh from its rivals. However, it retained a two-thirds majority in the Mizoram Assembly.
Wholesale price inflation rose to seven per cent in October, from 6.46 per cent in the previous month, whereas the rate of price rise in food articles (part of overall inflation) remained in double digits for the fifth month in a row in October.
However, food inflation moderated a bit to 18.19 per cent in October from 18.40 per cent in September.
The inflation could also be attributed to high minimum support prices given by the government and its social welfare schemes like Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).
Chidambaram, however, said it was the right policy of the government to give higher procurement prices to farmers for wheat, paddy, other cereals, cotton and wages under MGNREGS.
“It is widely accepted that while monetary policy is an instrument to contain inflation, it is a rather blunt instrument, although the only one available to the monetary authority. It is also widely accepted that monetary policy has little impact on food prices. The answer to inflation, therefore, especially inflation in food articles, is to increase supplies and to radically transform the manner in which commodities and food articles are stored, transported, distributed and sold in the various markets, especially urban markets,” he added.
Even as Fitch Ratings on Tuesday had cautioned the government against fiscal slippages due to elections, the finance minister asserted he would not compromise on fiscal consolidation. The government has targeted to bring down the fiscal deficit to 4.8 per cent of GDP in 2013-14 from 4.9 per cent in the previous year, but over 84 per cent of the target has already been touched in the first seven months of the year.
“At the top of the list is fiscal consolidation. There can be no compromise – and I speak for the government when I say there will be no compromise – on the decision to walk on the path of fiscal prudence and contain the fiscal deficit, step by step, year by year, until we reach the goal of 3 percent of GDP in 2016-17,” he explained, and added there was a need to pay attention to the revenue deficit too as borrowing should largely finance investment and not consumption.
Planning Commission Deputy Chairman Montek Singh Ahluwalia also said the fiscal deficit target for this year would be met.
The finance minister also said that financial sector reforms like the the Goods & Services Tax, Direct Taxes Code, Insurance Laws Amendment Bill and Uniform Financial Code could be game changers and each one of them required building of a broad consensus.
“My experience has been that consensus is built after several months of hard work and then, it crumbles when it is hit by a seizure of political opportunism,” he said.
Meanwhile, the Prime Minister's Economic Advisory Council Chief C Rangarajan said India can tolerate $30 billion worth of gold imports.
