Food prices may drive up inflation further: PMEAC

The risk of soaring inflation making the economic rebound painful is highly likely.

Updated: Feb 19, 2010, 14:39 PM IST

Zeebiz Bureau

New Delhi: The economy is fast returning to higher growth trajectory, but the risk of soaring inflation making this rebound painful is highly likely -- this was the key point of the Prime Minister’s Economic Advisory Council’s (PMEAC) review of the country’s economy.

Releasing the PMEAC’s outlook on the economy here, the council Chairman, C Rangarajan, told reporters that “the critical component” of the inflationary process in the current fiscal derives from primary food and sugar.

“Within primary food, goods that have exhibited the highest rate of inflation are foodgrain -- pulses, wheat, rice, in that order, and sugar in the manufactured category."

The runaway prices of the food commodities will likely drive up the headline inflation next fiscal, putting the government and the central bank under pressure to take policy actions, the council said.

"The danger of this spreading to other commodities certainly exists, especially in the backdrop of the strong recovery that the Indian economy has been making since the summer of 2009," it said.

The RBI in its January monetary review had revised upward the annual inflation rate outlook to 8.5 percent for this fiscal.
"Policy must remain alive to the danger that a significant transfer of food price inflation to the general price level might occur in 2010-11," PMEAC said.

According to Rangarajan, the economy is expected to grow by 7.2 percent in the current fiscal and exceed 8 percent in 2010-11.

"The council expects a bounce back in agricultural gross domestic product in the next year and maintenance of the desired trend growth of 4 percent in 2011-12."

He added that the industrial and services sectors were expected to continue their expansion “strongly” in coming years and hoped the government`s priorities and initiatives on infrastructure would proceed along desired lines.

"On this basis, we are making an initial estimate that the economy would grow by 8.2 percent in 2010-11 and by 9 percent in 2011-12," Rangarajan said.

On the issue of exit from the multi-billion dollar stimuli packages announced by the government since December 2008 to help the Indian economy tide over the global financial crisis, the council advised caution.

"While it is important to reduce the fiscal deficit significantly in the coming budget, it is important to safeguard capital expenditures, particularly in the infrastructure sectors," it said.
"Infrastructure spending is critical and even if the private sector investment in infrastructure is sought, government will have to provide adequate viability gap funding," the council said.

"Thus, there is no scope for compressing capital expenditures while undertaking fiscal correction."

Rangarajan further said the high fiscal deficit was unsustainable and the government should take steps towards consolidation in the budget.

India’s fiscal deficit is estimated to touch 6.8 percent of the GDP in the current fiscal, mainly due to the rise in the government spending in the wake of the global financial crisis.

The fiscal deficit was 6.1 percent in 2008-09.