Even though the fuel price hike this month would add 19 basis points, inflation rate would remain lower at 4.4 per cent during the current fiscal, compared to 5.4 per cent in the previous year, mainly due to policy measures taken in the last 18 months, the pre-Budget Economic Survey said in New Delhi.
The Survey, tabled in Parliament, said, however, the government would have to maintain vigil on this front as price management is a complex task, more so because of the pressures from rising capital inflows and global commodity price movement, particularly oil that breached the $100 a barrel mark.
Supply management is also critical to stabilizing inflation expectations, the economic report card said. In this regard, the survey said the reduction in tariffs on non-agricultural products has played an important role in bringing Indian inflation rate in line with the global rate and asked for the trend to continue.
So far as agriculture items are concerned, prices of essential and other items will play a critical role as poverty has come down and per capita income has risen, the Survey said.
But tariffs on farm products are high and modernization of Indian agriculture and agro-processing is going at a slow pace, which could also affect inflation.
It is particularly so because food still occupies a large portion of our consumption basket, the Survey said. While removing constraints on farm modernisation and urban land supply will lower inflation, further development.
The Survey said supply management will moderate pressure for upward revision of wages and prices, besides containing the pressure on cost-push inflation through monetary and fiscal accommodation.
While manufacturing has responded positively in this regard through higher investment and capacity creation, sectors like agriculture and infrastructure could face pressures.
"The supply side pressures are likely only in sectors like agriculture that suffer from structural problems, infrastructure sectors still characterised by a monopoly core, heavily dependent on government investment and relatively slow decision making sectors such as urban land," the Survey said.
However, global shortages and rising prices of these farm items are eroding the government's ability to meet shortfalls at affordable prices, the document said.
Monetary policy needs to address the inflationary expectations triggered by sub-sectoral price flare-ups arising from mismatches in demand and supply.
Monetary policy also has to manage the stress arising from continued increase in capital flows and the consequential changes in the exchange rate, exchange reserves and liquidity.
This is particularly challenging in a period of stagnancy or decline in production of durable consumer goods and deceleration in global demand for our exports, the Survey cautioned.