Battle against Inflation- India

THE ECONOMIC BOOM HAS LED TO A SURGE IN WAGES BUT SUPPLY OF PRODUCTS AND SERVICES HAS NOT KEPT PACE WITH SUCH DEMAND- CREATING A CLASSIC WHERE TOO MUCH MONEY CHASES TOO FEW GOOD, SPARKING INFLATION.
The RBI believes that centre now faces a huge challenge in setting its finances in order and may slip up on its target of capping fiscal deficit at 4.6% of GDP this year. "It is important to recognize that in the absence of appropriate actions for addressing supply bottlenecks, especially in food and infrastructure, questions about the ability of the economy to sustain the current growth rate without significant inflationary pressures come to the fore," RBI governor Duvvuri Subbarao said while presenting the first quarter review of the monetary policy in Mumbai.
"the large fiscal deficit has been a key source of demand pressures. Fiscal consolidation is therefore critical to managing inflation. While meeting quantitative targets, the govt. also need to focus on the quality of expenditure to sustain the fiscal consolidation process, which, in turn will help contain aggregate demand and raise potential output," the RBI said.