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Trim subsidies & free Diesel Prices to stop inflation from making headlines

Headline inflation is expected to moderate by the end of 2014, although chances of a sub-normal monsoon and higher crude oil prices due to the Iraq crisis pose risks to commodity prices, the Economic Survey said on Wednesday.

Importantly, it laid out a road map for taming inflation through fiscal consolidation, pruning of various subsidies, rationalisation of support prices of farm items, bringing in more efficiency to schemes like MGNREGS and agencies like the Food Corporation of India (FCI) and scrapping the archaic APMC Act.

“It is important to be cognizant of the fact that the deregulation of diesel prices, power-sector reforms and, generally, the move from administered to market-determined prices will release suppressed inflation in the short run. Nevertheless, the consequent reduction in subsidy and fiscal deficit will have the salutary effect of reducing inflation,” the survey said.

“The monetary-management challenge will also be helped by fiscal consolidation and addressing of supply-side constraints that exacerbate food inflation. All these factors, in tandem, are expected to create room for monetary easing later this fiscal year,” it said.

Wholesale price inflation dropped to a three-year low of 5.98% in the last fiscal, compared with 7 Percent and 9 Percent over the previous two years, although it again hit a five-month high of 6.01 Percent in May. Retail inflation, too, dropped to 9.49 Percent in 2013-14, from 10.21 Percent in the previous year. Food inflation, however, stayed high in 2013-14, topping at 11.95 Percent in the third quarter. The survey said projects selected for schemes like the MGNREGS do not improve farm productivity commensurately and have reportedly created labour shortage for the sector apart from causing a wage-price spiral. “The solution lies in the selection of productivity enhancing projects.,” it said.

Similarly, it advocated that the mimimum-support prices (MSPs) be linked to the cost of production, and that procurement should not be open-ended. The practice of some state governments of charging as high as 14-15 Percent mandi fee/tax and paying high bonuses over and above the MSP must be discouraged. “While farmers can be incentivised by gradually removing restrictions on exports, the FCI can learn to procure stocks from markets more efficiently and manage risks through the futures market,” it said. The survey also blamed the APMC Acts for creating monopolies and distributional inefficiencies.

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