Tuesday, November 1, 2011

What are the fiscal measures that govt should use to control inflation?

Following steps may be envisaged:
1. Removing structural bottlenecks and artificial scarcity esp. in case of foodgrain, Fruits, Vegetables distribution.. for a smoother supply flow of essential agri output. Here expenditure on construction of warehouses, cold storages, Post harvest infrastructure, efiicient PDS system etc may be considered. Currently the problem lies not so much in adequate output of the foodgrain (we infact are boasting of a buffer!), but in inefficient distribution of the same. Also in case of fruits & vegetables, loss during transport adds to inefficiencies. Expenditure on modernisation of agri will help increase the productivity of this sector.

2. Also, On expenditure side subsidies may be rationalised, even eliminated in certain cases.. subsidies do not entail any productive output in return and may inject inefficiencies in use of resources.
Targetted subsidies should be teh order of the day, and effective monitoring should be taken up to ensure it reaches the right beneficiaries. Impact of such subsidies must be measured for their effectivity in addressing the target beneficiaries' needs.

Expenditure on infrastructure sector will lead to greater capital formation, growth and increased GDP

Additionally, social sector reforms should continue eg. Nrega (that adds to productive asset), employment generation programs, Education and training programs to upskill Human Capital, Financial inclusion etc.. Also Support to SMEs, Agri, manufacturing sector reforms should be taken up to push up growth. Increase in GDP will put more money in hands of people.. consequently govr will benefit by way of increased tax revenues

3. On revenue side - Tax system may be rationalized with introduction of DTC, GST, simplification of tax filing process (Saral, Sugam etc), cascading effect of multiple taxation should be avoided, black money economy to sternly dealt with (DTAA, TIEA are being signed to this effect), dealing with corruption (bringing in lokpal and lokayukta, strengthening CAG/CIC/CVC/CBI/Police force etc)... al this would help govt raise it revenues.
Taxes on luxury items may be increased..

MOST IMPORTANTLY - Underlying Objective of Fiscal consolidation must not take a backseat. A greater fiscal deficit will only lead to more inflation, increased public debt, crowding out of pvt. investment, rising interest rates, lower investment, depreciating domestic currency and subsequent high import bill that adds on to more inflation
:so crux lies in targeting the expenditures n increasing the revenue receipts so as to decrease fiscal deficit...that would decrease inflation rate..!.. had it been that easy our govt would not have been in such a fix.. actually the matters get complicated by trade offs involved.. for eg. More govt expenditure means more money in hands of people.. so more demand for goods and services.. and if supply does not increase accordingly (say due to structural bottlenecks) then this move will only serve to increase inflation.

On the other hand, if govt expenditure are curtailed, employment, education, infrastructure, poverty alleviation measures will suffer, adversly affecting growth prospects.. causing widespread discontent (and mayb protests!)..

So govt will have have to choose a "right mix" of Revenue and expenditures measures.. coupled with RBIs monetary policy measures

Additionally International factors contributing to inflation eg. high commodity and crude oil prices need to be effectively managed.

No policy can work in isolation, therefore govt must strive to bring its fiscal and monetary policy in line with each other.. and combine both to counter inflation.

Source: IAS our Dream in Face book

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