In order to control inflation, the government should come out with a credible roadmap for reducing fiscal deficit in the forthcoming Budget, rating agency Crisil said in a report.
"To reduce and stabilise inflation, the Budget 2012-13 needs to lay out a credible roadmap to cut the fiscal deficit-GDP ratio by restraining consumption expenditure," said the report titled 'Putting a lid on inflation'.
It added that creating a fiscal space through expenditure reforms would enable the government to invest in agriculture as well as infrastructure, where supply is deficient.
Fiscal discipline, productivity improvement, and petroleum pricing reforms are the three key steps to pull the Indian economy out of the high-inflation trap, it said.
Headline inflation fell to an over two-year low of 6.55% in January, after remaining in double digits for most of 2010 and 2011.
Finance Minister Pranab Mukherjee, in his Budget to be presented in the Lok Sabha on March 16, is expected to announce steps to contain deficit which during the current fiscal is likely to exceed the estimate of 4.6% of GDP.
As regards inflation, Crisil said, it has been high in the last six years on account of adverse shocks from shortfall of food items and rise in fuel and commodity prices.
"The supply shocks had a lasting impact and inflation became persistent, as the government policy increased consumption demand but did not do enough to improve supplies through investments," it added.
The current pricing regime for petroleum fuels not only increases subsidy burden but made retail price adjustments sharp and unpredictable.
"Aligning international and domestic prices of petroleum fuels will reduce the surprise element of abrupt changes in administered prices. This will not only cut the subsidy burden but also rationalise demand for these products," Crisil Chief economist Dharmakirti Joshi said.