The Chief Economic Adviser to the Union Finance Ministry, Dr Kaushik Basu, today said that the government is doing its best to rein-in inflation and the inflation rate would have been much higher if it were not for its endeavours.

Speaking to journalists of The Hindu group of publications here, Dr Basu said that inflation is a difficult issue to handle, as it could arise from several, disparate sources.

It could indeed turn up as a side-effect of a noble exercise, such as for example, financial inclusion or squeezing out black money. While financial inclusion brings in more money into the financial system, black money, which typically moves slowly in its underground channels, becomes of high velocity when turned white.

Dr Basu stressed that while both financial inclusion and unearthing black money are desirable exercises, an unintended side-effect might be some upward pressure on prices.

Asked if importing foods, (the shortage of foods is believed to be the biggest cause of inflation today) could be an answer to inflation, even at the cost of swelling the fiscal deficit, Dr Basu said that in a situation where there is a minimum support price for food products, importing may not work out quite well. This is because if importing foods brings down the market prices of goods, then the MSP would turn out to be so attractive to the farmers that almost all the farm produce would end up in the public distribution system.

Nor is it practical to import food for short periods of time, because it is very difficult to “time it right”.

Dr Basu, however, said that the mechanism of giving food subsidy could be re-designed in such a manner that the poor are given money, out of which they buy the goods at market prices.

Admitting that such a mechanism has its own problems, he said that it could still be fine-tuned so as to serve as a better alternative than the existing method (which is to procure agriculture at prices that are attractive to the farmers, and then release it to the public at lower prices.) Dr Basu said that the government expects to reach close to the disinvestment target (of Rs 40,000 crore this year). “The market is saying that we will end up with Rs 6,000-7,000 crore, but we are going for a bit of a dash towards that target,” he said, adding that even if the target is missed, it would at worst be by a small margin.

Answering a question, Dr Basu said that India could set up a sovereign debt fund using its foreign reserves. While accepting the argument that much of the reserves is composed of ‘hot money', he said that pulling out (say) $20 billion would not matter much, and could be used for making strategic investments abroad.

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