Inflation is expected to moderate to 6.5-7 per cent by March end but spiralling global crude oil prices pose a challenge in the coming months, said the Economic Survey 2011-12.
The Survey, tabled in Parliament by Finance Minister Pranab Mukherjee on Thursday, also said that inflation would further moderate during the course of next fiscal on account of tightening of monetary policy by the Reserve Bank and other measures.
"By March 2012, headline inflation is expected to fall to 6.5 -7 per cent and further moderate in the months ahead, barring 'unexpected shocks'..." it said.
The survey said that recent geo-political uncertainties are once again putting pressure on crude oil prices globally which represent major risk and challenge ahead.
"The best course of action would be to persist with regular steps-adjustment of domestic energy prices which will help reduce inflationary pressure and fiscal consolidation efforts," it said.
Taking stock of the price scenario throughout the year, the survey observed that in the current financial year, the gap between wholesale price index (WPI) and consumer price index (CPI) inflation has significantly narrowed due to drastic fall in food inflation.
The headline inflation, after remaining in single digit from August 2010 to August 2011, briefly touched double digits at 10.1 per cent in September 2011 but came down to 6.5 per cent in December 2011.
"The major drivers of food inflation during the current financial year were milk, eggs/meat/fish, gram and edible oils. WPI food inflation (weight 24.3 per cent) has significantly dropped from 20.2 per cent in February 2010 to 1.6 per cent in January 2012," it said.
Although the government is very much hopeful that inflation would decline to 6 per cent by March end, it inched up again to 6.95 per cent in February 2012, after declining for five months.
The February figure showed that it would continue to hover above the projected level and would necessitate fiscal steps to combat price rise.
Finance Minister Pranab Mukherjee is expected to announce steps to contain price rise in the Budget for 2012-13 to be presented on Friday.
However, the survey said that with the supply side factors feeding into food inflation and an uncertain economic scenario in advanced countries, the task of monetary policy calibration has been particularly challenging.
"Liquidity conditions have generally remained in deficit during 2011-12. However, the RBI has addressed liquidity concerns via the use of its standard tools," it said.
Experts said the RBI move to keep key policy rates intact in its policy review today may support the government projection as it has already injected Rs 48,000 crore liquidity last week by reducing Cash Reserve Ratio (CRR) for banks.
"There is a need to examine the linkages and trade-offs between policy rate changes and inflation in the Indian context, for better calibration of monetary policy," the survey suggested.
"There is also scope to further sharpen monetary policy and macro prudential tools to deal with asset price bubbles in the real estate and stock markets and the risks associated with these, which carry implications for the real economy," it added.
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