Inflation threat is there

Mrinal K. Biswas

Arun Jaitley’s return to finance ministry after convalescence from serious surgical operation will give him little respite as he will be under tremendous pressure to firefight the multiple heads of discord in the  country’s economy.
To keep the threat of inflation away is the most important task before the government at this critical juncture of uncertainties on the global and domestic fronts. Inflation hits the commoners most and the power that is looking askance at this threat in the election time round the corner.
India has long ceased to enjoy the advantage of an economy of autonomy after it being integrated with rest of the world. With signs of volatility in the international money market looming large, developed countries have once again been resorting to monetary stimulus which is certain to affect liquidity flows to emerging markets like India. While stimulus makes the national governments to compensate any   liquidity shortfall in these well-off countries flow of funds outside their economies to countries like India is bound to dry up as a consequence.
Apart from tighter global financial conditions in the wake of a rich nations’ retreat from  economic integrations combined with the spillover of global trade conflicts and ever present inter-State tensions India’s domestic market is confronted with multiple challenges on the economic front. Reserve Bank of India, international financial institutions and rating agencies are concerned about India and her economy.
The most important point is whether the monetary authorities and the government will be able to keep the fiscal deficit target of 3.3 per cent of GDP for this financial year. While the government maintains a brave face RBI takes cautious moves with its understanding that inflation remains a headache.
Fiscal deficit occurs when in a particular year government meets its expenditure requirements by borrowings. If expenditures go up government borrowings increase. The government borrowings leave smaller amount of money available for the non-government sector. Money becomes dearer making non-government projects costlier and shooting up of goods prices. Inflation stares in the economy. The current target of 3.3 per cent of fiscal deficit is 0.3 per cent higher than the government aim of bringing it down to 3 per cent by 2020-21. This target was fixed after 2003 enactment of Fiscal Responsibility and Budget Management Act.
Of the two authorities, the government is to keep expenditures under leash through budgetary policy but often it fails because of increasing number of projects, HRAs, subsidies, government employee payment hikes, pensions etc. RBI on the other hand determines policy rates of interests of the money side and set it go higher if the government borrows more to meet its increasing costs. That is the time when money is not available at reasonable rates for the non-government sectors because of government’s large grab on the money market.
As the government is committed to change on the higher side the minimum support prices for the agricultural produce and account for stiff rise of the global oil prices, apart from meeting ever increasing revenue expenditures on things like project costs and payments to government employees, this will be a tall order to keep the fiscal deficit under the mandated level. The recent dip of the rupee value vis-à-vis US dollar, requiring more money for imports, and Kerala flood relief costs add further pressures on the expenditures side.
Coming up of all these is the risk of failing to achieve the inflation target of 4 per cent. Already in July this year inflation reached 4.17 per cent (against 2.36 per cent in July last year, almost 70 per cent is to increase this year).
Reports say that India imported about 220 million tonnes of crude oil last year for USD 87.7 billion at an average of Rs 65 per dollar. The same foreign exchange payment may go up by Rs 80 crore. There is a fear that a dollar-denominated imported inflation will hit the Indian economy. RBI officials however maintain that any run on the rupee is not on the cards as it is a contagion (infection in economic jargon) effect impacting all emerging economies not unseen in the global scenario. But fear persists that in a bid to arrest inflationary pressures the government may be forced to shed some of the domestic expenditures if crude import account remains inelastic.

Sunday, 26 August, 2018