A deficient monsoon and poor rains in parts of country could go to amplify inflation expectations in the country, according to Reserve Bank Governor D. Subbarao.

Delivering a lecture here hosted by the Kerala Planning Board last evening, he said that the cereal buffer stocks were reassuring but the country may be faced with a crisis on the pulses and oilseeds front.

INFLATION TRENDS

This can raise inflation expectations as people generally tend to expect inflationary trends to feed into themselves. Neither has the supply response been adequate.

On the problems facing the macro-economy, he said that decline in investments was a major area of concern.

The historically high current account deficit (CAD) is borne out of the adverse fiscal deficit-revenue combine. Borrowings are used to meet current spending.

The government often chooses the soft option to tax rather than control spending. Sustainable gains on this front can only flow from expenditure compression.

Here is where quality of fiscal adjustment assumes importance. “We cannot avoid spending in must items such as defence, salaries and subsidy, for instance,” he added.

CONTROL SPENDING

But politicians find it easy to cut capital/productive expenditure. This is why fiscal consolidation has become quintessentially a political issue.

D. Subbarao made a call to enforce Fiscal Responsibility and Budget Management Act. The quality of financial adjustment should be ensured to carry forward the fiscal consolidation.

The inflow of capital has been too much or too little to finance the huge CAD. The supply has never matched the ideal demand/supply situation.

Even when the inflows were available, they have been volatile at best. So much so, the G20 meeting has had to devote itself to discussing the issue of currency wars.

This is because too much flow weakens the home currency while too little does exactly the reverse. Depreciation can in turn cause instability and further outgo of capital.

>vinson.kurian@thehindu.co.in

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