The government expects retail inflation to ease to 4.5-5 per cent in 2016-17 fiscal mainly due to continued downward pressure on global commodity prices and prospects of a normal monsoon.
The Economic Survey 2015-16 presented in Parliament today said another year of below potential growth will mean widening of output gap resulting into additional downward pressure on underlying inflation, which has already fallen below 5 per cent.
Meanwhile, if the monsoon returns to normal, food prices will ease, as the government remains committed to disciplined increase in minimum support prices for cereals and the rural wage growth remains muted, it said.
"For all these reasons, we project that Consumer Price Index (CPI) inflation will ease to between 4.5-5 per cent in 2016-17. We therefore think that the effective stance of monetary policy could be relaxed", said the Survey document tabled by Finance Minister Arun Jaitley in Parliament.
Government has projected the economy to expand by 7-7.75 per cent in 2016-17 against 7.6 per cent projected for current fiscal. It pegs the long-term potential at 8-10 per cent if exports grow rapidly.
The Reserve Bank, which had set a retail inflation target of around 6 per cent by January 2016, expects the rate of price rise to be around 5 per cent by the end of 2016-17 financial year.
In January, retail inflation was at 5.69 per cent, the highest in last 16 months.
The Survey expects that further price pressure relief should come from abroad.
"Oil prices have plunged in the first two months of 2016, as have some commodity prices, suggesting that input prices are likely to be lower next fiscal year.
"Beyond this factor lie other deflationary forces. As growth in China continues to slow, excess capacity there could continue to increase, which will put further downward pressure on the prices of tradable goods all around the world", it said.
It suggests oil prices to average to USD 35 per barrel next fiscal year compared with USD 45 per barrel in 2015-16.
However, the Survey said the part of this might be off-set by upward pressure coming from a depreciation of the rupee, especially if the US Federal Reserve Bank continues to raise interest rates, prompting capital flows to the US, although the prospects of aggressive Fed action are receding.
All this suggests that the RBI should be able to meet its target of 5 per cent (retail or CPI inflation) by March 2017, it said.
Global commodity prices such as crude oil, metals and cereals continued to decline across the globe in 2015-16, notwithstanding a few short spells of rebound.
The inflation, based on CPI dipped to 4.9 per cent during April-January 2015-16 as against 5.9 per cent in 2014-15.
While, the core inflation (non-food and non-fuel) also remained range bound, inching up marginally from 4.2 per cent in March 2015 to 4.7 per cent in January 2016.
"The astute food supply management policy of the government has been successful in containing food inflation despite the below average monsoon this year and the resultant sporadic spurts in the prices of pulses and a few other essential commodities in the second half of the year," said the Economic Survey.
The easing of inflationary pressures paved the way for reduction in policy repo rates by 125 basis points or 1.25 percentage during 2015 by the Reserve Bank.
On the overall trend in inflation, the Economic Survey said the persistent and elevated levels of inflation, in particular food inflation, were a major concern of the government during the period 2010-11 to 2013-14.
The rising trend in prices was reversed from 2014-15 onwards and the economy has been experiencing sustained moderation in general inflation ever since, it added.
According to the survey, the decline in inflation was broad based and mainly driven by the fall in inflation in food articles and items under non-food and non-fuel category.
The decline in CPI core inflation was largely on account of decline in the inflation of housing (rent), transport, communication, education and other services, it said.
"The decline in food articles inflation during 2015-16 so far was mainly on account of a fall in the prices of cereals, vegetables, fruits, milk, egg, fish and meat".
However, the Survey said spike in prices of pulses on account of low domestic production kept food grain prices high.
