SUGGESTION TO PMEAC CHAIRMAN DR C. RANGARAJAN

SUGGESTION TO PMEAC CHAIRMAN DR C. RANGARAJAN

To: The Honorable Prime Minister Economic Advisory Council Chairman

Dr. C. Rangarajan.

From: Athinarayanan Sanjeevraja

Date: 24.10.2011

RE: Taming Inflation

Suggestion: Tightening Fiscal Policy

Good Morning Sir. I read your report which has been published in “THE HINDU” dated on October 21, 2011. You were talking about the rollback of the excise duty stimulus. I think you are heading into the opposite direction sir. We need more symmetric use of fiscal policy is now required to temper growth and inflation. Because inflation continues to remain elevated despite RBI has increased interest rates 12 times since March 2010. Monetary policy tightening may have been a stronger lever the taming inflation in the past but not today. I am still insisting that monetary policy no longer works to taming inflation. The answer, therefore, is fiscal tightening. Taxes need to go up and spending cut. This would curtail demand and ultimately price pressure. A hike in income tax rates would weigh on the purchasing power of households and rein in inflation expectations. Our goals maintain ambitious program to build out infrastructure. In addition, governments will continue to run sizeable deficits in the coming year. Of course, this may well be justified. Moreover, you help to raise the productive potential of local economies and drive down excessive saving rates among households.

Fiscal tightening, of course, politically unpalatable but aggressive fiscal tightening would offer a chance to fiscally achieves meaningful consolidation of the public money. Moreover, the world would hardly benefit if India’s inflation continues to remain elevated. Tempering price pressures in India helps western consumers too in struggling with high unemployment and considerable debt.

Thank you very much for your kind attention Sir.

Sincerely,

Athinarayanan Sanjeevraja.

Follow me on Twitter: @ Athinarayanan Advisory Authority

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