Let me offer a quick recap of the macroeconomic situation. Growth is stabilizing on the good harvest, strengthening exports, and some early signs of resumptions of large stalled projects. However, growth is still very weak. We have to work to ensure macroeconomic stability, which means strengthening growth, especially through investment, maintaining a moderate current account deficit, achieving a fiscal deficit consist with government’s fiscal roadmap, and reducing inflation. The government has to be commended for it’s efforts to revive growth, narrow the current account deficit , and fiscal targets. I have no doubt that the fiscal deficit or the year 2019-2020 will be close to, or below, the finance minister’s red line.
Going forward, however, we need to continue on the path of fiscal consolidation constantly improving the sustainability and quality of fiscal adjustment. It is very important that we spend money on needed public investment, even while reducing misdirected subsidies and entitlements. Good fiscal control will help us in our fight against inflation. So, will moderation in agriculture support price inflation, which will ensure that these prices only prices a baseline level of support when the farmer is in difficulty, without displacing market prices. Accurate market prices, together with good dissemintaion of data on swoing patterns, can do a far better job than support prices in directing agricultural production to where it is most valuable and needed.
Somewhat paradoxically, raising energy prices to market levels will also lead to lower inflation over the medium term, the horizon over which the RBI is trying to contain inflation. The reason is that the higher prices will reduce excessive comsumption, reduce subsidies and fiscal deficits and incentivize investment and competition, even while allowing prices to be determined by an increasingly stable and plentifully supplied global market for energy. The consequences of inappropriate or inadequate price adjustments will be that the Reserve Bank will have to bear more of the burden combating inflation.
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