19-02-2013, 03:44 PM
RENEWED FOCUS ON SUPPLY SIDE MEASURES ESSENTIAL FOR PRICE STABILITY – ECONOMIC SURVEY
ABSTRACT
Wholesale Price Index (WPI) which remained persistently high throughout 2011 due
to increasing global commodity prices and high crude prices has started showing signs of
moderation and it is expected to touch 6.5 to 7 percent by March 2012. It may further
moderate during 2012-13 due to tightening of monetary policy and other measures put in
place by the Government. Taking stock of the price situation, Economic Survey 2011-12
has observed that in the current financial year the gap between WPI and CPI inflation has
significantly narrowed due to drastic fall in food inflation. CPI-IW inflation, after remaining
in single digit from August 2010 to August 2011, briefly touched double digits at 10.1
percent in September 2011 but came down to 6.5 percent in December 2011.
The Survey says that the major drivers of food inflation during the current financial
year were milk, eggs/meat/fish, gram and edible oils. WPI food inflation (weight 24.31
percent) has significantly dropped from 20.2 percent in February 2010 to 1.6 percent in
January 2012 mainly on the back of seasonal fall in fruits & vegetables prices and good
harvest leading to lower inflation in cereals
The Survey comments that the objective of monetary policy during 2011-12 has been
to rein in inflation and contain inflationary expectations. With supply side factors feeding
into food inflation and an uncertain economic scenario in advanced countries, the task of
monetary policy calibration has been particularly challenging.
Liquidity conditions have generally remained in deficit during 2011-12. However,
the RBI has addressed liquidity concerns via the use of its standard tools. The monetary
market has, in general, remained orderly during 2011-12 with the rates in collateralised
segments moving in tandem with the call rate, but generally remaining below it.
The Survey suggests that there is a need to examine the linkages and trade-offs
between policy rate changes and inflation in the Indian context, for better calibration of
monetary policy. There is also scope to further sharpen monetary policy and macro
prudential tools to deal with asset price bubbles in the real estate and stock markets and the
risks associated with these, which carry implications for the real economy.
Commenting on the outlook in the area of price management the Survey says that
Monetary policy remained focussed on controlling inflation and anchoring inflationary
expectations, which has slowed growth. These effects, coupled with a favourable base effect
in prices and continued global slowdown, are expected to moderate inflation to around 6.5 to
7.0 percent by March and further moderate in the months ahead, barring unexpected shocks,
such as oil prices in international markets.
The Survey observes “Looking at, vigilance is called for in getting back to a low
inflation/sustained high growth path in India, by renewed focus on supply side measures and
include fiscal consolidation, including stepped up regular adjustments in domestic energy
prices.” It says that high level of food stocks and producers responses to higher protein and
other food prices should help to maintain overall price stability in the country.