Inflation to come down sharply by third week of Dec: Kaushik Basu

High inflation would continue for more than a month but the government was hoping for a sharp decline in food prices by the the third week of December, said Kaushik Basu, chief economic advisor in the finance ministry on Friday.

Also, due to concerns of slowdown, excessive fiscal consolidation was not an option to control prices, though the government would stick close to its target of maintaining a 4.6 per cent fiscal deficit by the end of this year, he said.

Food inflation inched-up to an almost nine-month high of 12.21 per cent for the week ended October 22.

In tandem with RBI projection, Basu said he expected inflation would come down to 7 per cent by the end of this fiscal.

“Inflation is likely to be high for several weeks more and food inflation will be difficult. But I expect food inflation data from the third week of December to show a very steady and sharp decline,” said Basu on the sidelines of an event here on Friday.

“We do believe that fiscal consolidation very important. But we do not want to rush into this, because we don't know if recession is over, which was not the case one year ago. In fact, all the global economies are now going slow on fiscal consolidation because of concerns of slowdown. So India does not want to go excessive on fiscal consolidation but broadly wants to keep very close to the target of 4.6 per cent fiscal deficit,” said Basu.

The Finance Ministry has set a fiscal deficit target of 4.6 per cent of the gross domestic product (GDP) for 2011-12. However, according to latest data from the Controller General of Accounts, it has already reached over 70 per cent in first six months of this fiscal.

Liquidity tightening was not helping tame inflation due to the spill-over effect of increase in money supply in industrialised nations through measures like quantitative easing (QE) in the US, he said.

The Reserve Bank of India has raised key policy rates 13 times since April 2010 to reign-in rising food prices.

“Current inflation level of close to 10 per cent is unacceptable. If you try to bring it down drastically, factories will close down and unemployment will rise,” he said.

“Monetary tightening has taken place, but one cannot keep tightening money supply like crazy. We need to do a balancing act. If we keep raising rates, there would be unemployment as factories will close down,” he said.