What is really worrisome is that unless and until the monetary authorities take it upon themselves as their task it will not be possible to bring about monetary discipline in the Indian economy. A beginning has been made with the introduction of the new series which should prove to be a fruitful exercise as it is more upto date and depicts the realities. The main question that bothers many economists and monetary experts is whether inflation in India is a true indicator of the ground realities. It is normally observed that only during times of elections and budget exercises that inflation gets its due importance. Inflation is the only indicator that is understood by the common man and any increase in the price and cost of living is wholly blamed on the government functioning.

Today the government is heavily criticised for its fiscal indiscipline with fiscal deficit figures rising by leaps and bounds with each passing year. Both government and monetary controlling authorities have taken it as a topmost priority to curtail expenditure and to make it more productive. This year’s Budget has included harsh measures with hard hitting effects like cut in subsidies, taxing export incomes which will in the long run help rein in fiscal discipline. Inflation control and money supply will be closely monitored and hopefully this will help keep inflation in check. Today India is far better placed than a year ago. External front exports are picking up, domestic industries have started showing of higher growth rates and the revenue earning of corporates are rising. So if the finance minister has introduced strong measures in the Budget will it affect the performance of the manufacturing and corporate sectors. What needs to be seen is how the ruling coalition incorporates these hard decisions.

The task before the government at the moment will be to control the rising price levels and to enhance the living standards. But all this will have to be done at some cost. Who pays the cost, the government or the common man. Well, if the government charts out its priorities it will not be a difficult task to handle things. But, delays and mismanagement will only worsen the problem. Inflation has a direct bearing on the entire functioning of the economy. Today the priorities of the government are to reduce expenditure,improve revenues through better tax collections and most importantly decide on a more realistic target of fiscal deficit. The government has hinted that it will control the fiscal deficit and try and scale it to levels below 5 per cent of GDP. But how the government goes about doing this is of importance. Today India has pulled out of recession and growth is being witnessed in several pockets. Infrastructure industries are showing signs of recovery and the governments’ revenue earning is wellwithin control. As for tax collection, the finance ministry has just to fine-tune the collection mechanism. With economic buoyancy expected to be on the rise, the IT and corporate tax collections should be higher this year. But the finance ministry will have to look into the international commitments of the WTO and try and harmonise its external sector by reducing the number of restrictions.

Yashwant Sinha faces an acid test especially on reducing expenditure including pruning staff costs, subsidies and high interest liability. In the current year the wage bill amounted to Rs 82,000 crore, subsidies another Rs 24,000 crore and an additional pension liability of Rs 10,000 crore. If Sinha wants to match his revenue earnings and expenditure figures he will have to play his cards well. Together with all this it is the inflation that will start creeping in once subsidy cuts and hike in diesel, kerosene, petrol, LPG starts becoming effective. Inflation which was based on the old series saw a static growth of only 2 per cent with the new series and the recent happenings in the economy is peaking at 5 per cent levels. Several economists have argued that inflation was artificially subdued and it is only with the passage of the Budget and with the hike in LPG, kerosene prices has led to a rise in inflation levels.

In India inflation is a politically sensitive issue and it is but natural that the finance minister will lose his sleep if it goes out of control. An announcement that urea prices will be hiked and subsidy will be reduced and foodgrain prices on PDS will be increased will set the entire opposition afire and heated debates and walkouts in the parliament may result in the finance ministry ultimately bowing down to pressure and announcing roll backs. But this does not seem to the case this time round. Sinha is committed to stand by his budget announcements and no matter what comes will not bend to any pressures. Today cut in subsidies is being reflected in the prices of foodgrains rising and the common man’s fuel becoming more expensive. This is reflected in inflation crawling up with no immediate setback seen in sight.

Inflation has its roots in every nook and corner of the government functioning. Fiscal deficit is directly related to inflation. If inflation rises it is the government expenditures that gets inflated which puts pressure on the fiscal functioning. On the other hand, a low inflation is detrimental as it eats into the profits of the companies thereby reducing the earning capacity. What India basically faces today is a crunch in the purchasing capacity of the consumers. Therefore, if the government wants to hasten the demand it will have to announce reliefs to the consumer community which will help pep up demand.

Today although money supply is growing by around 15-16 per cent in the economy there is a shortage of actual liquid or hard money flowing with the public. So what is happening is that goods are being produced but there are no takers. Again competition has entered into all segments and to survive in the markets companies are announcing huge discounts on their products which is making the market mechanism unhealthy to function. Cost cutting is reducing the quality of the products thus rendering the small producer totally out of business. This is reflecting in low margins in the markets which are not economical to function within.

Yashwant Sinha is trying his level best by improving productivity in the economy at all operating levels. VRS which was announced was not welcomed by the opposition and it resulted in best brains opting for golden handshake, and the inefficient staff rejecting the idea. Subsidies are eating into a major chunk of the government expenditure. But over the years lapses on the part of the government have made this burden impossible to handle. Any announcement of a cut in subsidies is looked upon as a political gimmick and always the same tune is sung that the poor man will suffer. But are subsidies really targeting the needy. Everybody knows that they are meant for the urban rich. Then why not let the finance minister do his job which will in the long run help bring about fiscal discipline in all quarters. What does the government in such a situation do. If he does not prune subsidies then the fiscal deficit rises if he does then the prices rise. What is a better option.

Well looking at this year’s figures of fiscal deficit it is being taken quite seriously in all quarters and for the first time the opposition is supporting the government moves. Although a roll back in subsidies is still being debated with the finance minister sticking to his guns about no cut, it is justified that fiscal deficit if let loose will render the entire budget making exercise a total waste.

But today the debate is not so much on how much the government spends but on what it spends. Fiscal deficit if it is to be targeted will result in prices rising and the government expenditure getting out of control. A higher fiscal deficit is no longer a taboo even with conservative international funding agencies like world bank. Leading international economists are of the opinion that a cut in fiscal deficit only means that investment in infrastructure will be curtailed which will directly result in human capital growth suffering.

In India growth is mainly driven by agriculture and depends on foodgrains production as fuel . Yashwant Sinha should be bold and not hesitate if he fixes a higher fiscal target. Today there is no fear of a higher fiscal deficit fuelling inflation because there is an ample supply of essential goods and services in the economy. So much so, that the government is losing heavily on maintaining high inventories. High buffer stocks which are in the 5. 5 million tonne range are proving the point. But with the drought that has hit several parts of the country and with the next year rainfall expected to be a failure and with the government already sanctioning two million tonnes from its buffer stocks for drought relief measures, it’s only time that will tell as to where inflation will settle at.

Today the Indian monetary authorities and politicians have a phobia that a higher inflation means that they have failed in the task of governing the economy and that they will not be re-elected. But that is not the case. A low inflation which was prevailing for the past couple of weeks at around 2 per cent is a worse of indicator than high inflation. Budgets will show that politicians have a tendency to overspend and a fright that this will lead to double digit inflation which will make them unpopular. But it is better if India has to sustain that it settles for a little higher level of inflation than keeping it artificially pegged at a lower level which is detrimental to both the government and the producers.

Inflation is an indicator which has its roots in all quarters. Monetary aggregates like interest rates and value of the rupee and imports are correlated with the inflation. So if the government wants to bring about efficiency in the entire macro functioning of the economy it will have to well target it’s inflation forecasts. When India opened its gates to liberalisation way back in the late 1990s business saw new opportunities emerging and borrowed heavily from international markets at very high levels of interest ranging from 14 to 20 per cent to build world class factories which were essential if India wanted to face competitiveness. It was a known fact that when Indian business borrowed at high interest rates the worldover foreign competitors were enjoying far lower rates of interest. But there were expectations that inflation and currency depreciation would help them overcome this. RBI has rightly recognised that inflation and currency depreciation are linked as it has a direct bearing on the importprices which automatically spur inflation in the economy.

So what RBI should do as an immediate step should be is to target a higher inflation of say 7-8 per cent which will not only reduce the debt burden of the businessman but of the government also. As wage revisions will take place it will not be such a burden on the poor man also. So fright about rising inflation should be done away with as India today is in a position to deal with a higher inflation rate.