Fiscal & Monetary Policy: Divergence & Paradox

Since past few months, Food inflation & the General Price level have been the topic of heated debate. RBI's successive hikes since past 11 months expresses the urgency to deal with mounting inflation. Repo rate has been increased to 8.5%. Recent food inflation data shows 11%+ level. The rise in Prices seems to be peaking now, only to fall from next calendar year.


During 2011, Fiscal policy has been expansive, meaning demand-boosting. Recent data shows Government has already reached around 68% of the Fiscal deficit target for entire 2011-12. Policy announcements, newer laws, focus on Social infrastructure, infusing capital in loss making PSUs & a few more signify an expansionary stance fiscally. Recent hike in Petrol prices means difficulty in letting Diesel & Cooking Gas prices rise, this means continued & even increased Subsidy burden.


Lack of relative revenue generation, increasing expenditure & RBI's anti-expansion Monetary stance clearly bring out a divergence between Fiscal & Monetary policies in India. This has to do with following reasons:

1. Government's utmost concern is continued expansion of Economy(read GDP). This is essential because Growth is the fuel for our Development process & also due to competitive atmosphere Internationally amongst the BRIC nations.

2. RBI's key concern is containing inflation, which hits the aam aadmi hard. Though the Theory of burden on common man in current outlook is debatable, still it does result in diversion of Income of households towards basic necessities & money cost. Due to Dear money policy, Private Expenditure + Investment Expenditure are impacted, these fall. Growth in GDP is restrained.


Here's The divergence:
> Fiscal Policy is Growth-expansive, Monetary Policy is Growth-unexpansive.
> Such a divergence may well be the reason for continuous 9%+ inflation, recently being 11%+.
> This may even result in confusion for Economic agents, Fiscal Policy may not work out well.

The Solution in near term:

A pause in rate hikes by RBI, Vociferous reforms-drive by the Government especially in case of NMP(National Manufacturing Policy), NTP(National Telecom Policy), DCT(Direct Cash Transfer) in place of PDS, Usage of Buffer stock to reduce Demand-Supply gap of Food articles, Willingness to sacrifice some growth for reduced prices & above all a synthesis between the Finance Ministry & RBI is the need of the hour. More on this issue soon.