With governments going for populist measures like energy price cuts and doles for agri produce, RBI Governor Raghuram Rajan today said this would compound the troubles of the central bank.
"The consequences of inappropriate or inadequate price adjustments will be that the Reserve Bank will have to bear more of the burden in combating inflation," Rajan said, delivering the D R Gadgil Memorial Lecture here.
From the medium-term perspective, it is in the best interest of the Reserve Bank that prices are linked to the market realties, he said.
"The reason is that higher prices will reduce excessive consumption, reduce subsidies and fiscal deficits, and incentivize investment and competition, even while allowing prices to be determined by an increasingly stable and plentifully supplied global market for energy," he said.
The central government recently announced populist measures like increase in the annual quota of subsidised LPG cylinders to 12 per family, reduction in the CNG and PNG prices, while state government cut power tariff.
There was also an increase in subsidy for sugar exports by Rs 3,333 a tonne.
Rajan said that moderation in "agricultural support price inflation" along with fiscal control will also help fight inflation.
THe Governor said he expects the fiscal deficit for FY 2014 to be "close to, or below" the targeted 4.8 per cent.
"Going forward, however, we need to continue on the path of fiscal consolidation constantly improving the sustainability and quality of fiscal adjustment," Rajan said, making a case for spending on public investment rather than on misdirected subsidies.
Under Rajan, the Reserve Bank has hiked its key rates thrice, aiming to curb the runaway inflation, which stood at 8.8 per cent by the newly introduced consumer price indice for January.
On growth, he said though the good harvest, better exports and "early signs" of resumption in stalled projects point to a stabilisation, it is still "very weak".
"We have to work to ensure macroeconomic stability, which means strengthening growth, especially through investment, maintaining a moderate current account deficit, achieving a fiscal deficit consistent with the government's fiscal roadmap, and reducing inflation," he said.
In this context, the RBI Governor commended the work done by the central government on reviving growth, narrowing CAD and meeting fiscal deficit targets.
