FinMin hopeful on inflation, deficit

Mid-year review says targets on both must be adhered to for giving RBI enough room to stimulate growth, particularly in manufacturing

The Reserve Bank of India might or might not reduce its policy rate in its April review but the Union finance ministry is hopeful that keeping inflation below six per cent gives leverage to the central bank to boost economic growth.

Inflation, the government announced on Friday, fell in January to an eight-month low of 5.05 per cent.

In its recent mid-year review for 2013-14, the ministry said steps were required to control wholesale price index (WPI)-based inflation further to below six per cent, so that RBI gets the needed leeway to support economic recovery. It also talked again of containing the fiscal deficit for the financial year to 4.8 per cent of gross domestic product, while protecting capital expenditure.

The review is a bit dated, as it is based on the economy’s performance till September. Generally tabled in Parliament during December, it was presented to the Rajya Sabha on Thursday. As such, it harped on the apprehension that headline inflation might increase in the coming months, in the wake of the increasing trend in non-food manufactured products inflation. "However, should global commodity prices fall further and the rupee stabilises, core inflation could continue to be at lower levels,"the review said.

After September, inflation did rise in October and November but cooled in the next two months. WPI inflation rose 7.24 per cent in October from 7.05 per cent in September and then to 7.52 per cent in November. However, this eased to 6.16 per cent in December and 5.05 per cent in December.

On the other hand, it was core (non-food manufactures) inflation which rose in January. It inched up to three per cent from 2.8 per cent a month before.

The review said revival of growth in the industrial sector, particularly manufacturing, was essential for raising the growth rate and sustaining it over the medium term.

After September, industrial production declined for three consecutive months. It rose 2.7 per cent in September and then declined 1.6 per cent in October, 1.3 per cent in November and 0.6 per cent in December. Manufacturing, the biggest segment of the industry, contracted 2.7 per cent in October, 1.7 per cent in November and 1.6 per cent in December.

The review emphasised on adhering to the fiscal consolidation target for 2013-14, while protecting capital expenditure. By December, with three more months for the financial year to end, the deficit had already touched a little over 95 per cent of the budget estimate for the full year. The government might finally be able to trim the deficit below the targeted 4.8 per cent when Finance Minister P Chidambaram rises to present the vote-on-account for 2014-15 on Monday but whether he does so without sacrificing capex is yet to be seen.