Brace up for a bout of sustained inflation: Eco Survey

The recent spate of rising inflation figures has become a concern for the Indian economy, and as per the Economic Survey 2007 this is here to stay.

Brace up for a bout of sustained inflation, that's what the Economic Survey suggests. It says that the pressure of prices will persist during the year because of short supply of  essentials, and firm international prices. On the other hand, demand is being fed by high growth, the surge in reserve money because of foreign inflows, the rise in money supply and the huge increase in credit.

The impact of duty cuts and the Reserve Bank's policies will be felt in the days to come. But unless supply of essentials is increased, inflation will not be fully tamed.

The survey calls for increase in domestic production of staples like rice, wheat, cooking oils and pulses through better technology. It says, in the short run,  there will be a gap between the remunerative price paid to farmers and fair price to consumers but these should not translate into increased food subsidy.

The Eco Survey also says that high growth is not incompatible with low inflation, in other words low inflation can exist with a high growth rate. It says while employment opportunities have improved, there is unemployment, which is high not because growth has been high but because there hasn’t been sufficient growth and in fact it makes a case for higher growth.

What the Survey says:

- Expects pressure on prices during this year
- Says short supply of staples, high global prices are the reasons
- Demand fed by high growth, foreign inflows, money supply, credit
- Impact of duty cuts, dear-money policies to be felt shortly
- But inflation will remain unless supply of staples improves

Chief Economist at Crisil, Subir Gokaran says, "I think the survey is being very realistic and blunt but it has made an admission that its difficult to control the kind of inflation, which is driven by food prices in particular. It is a challenge from a medium-term perspective to keep inflation within check. One should not expect very immediate relief or solutions to food driven inflation. I appreciate the candor that the survey is expressing on this issue."

Therefore, while one needs to be prepared for sustained inflation, there is a tone of caution against measures that could hurt growth. In other words it calls for a calibrated approach to contain inflation, so that while we have low inflation the growth momentum is sustained.