New Delhi: Retail inflation is likely to soften to 5-5.5 percent in 2015-16 as benign oil prices, weak global demand and increased agricultural supplies would help keep prices within limits, says the Economic Survey.
"Consumer price inflation (CPI) which is likely to print at 6.5 percent for 2014-15 is likely to decline further. Our estimate for 2015-16 is for CPI inflation to be in 5.0-5.5 percent range and for the GDP deflator to be in the 2.8-3.0 percent range," the Economic Survey for 2014-15 tabled in Parliament by Finance Minister Arun Jaitley today said.
Structural shifts in inflationary process are underway caused by lower oil prices and deceleration in agriculture prices and wages.
"These are simultaneously being reflected in dramatically improved household inflation expectations. The economy is likely to over-perform on RBI's inflation target by about 0.5-1 percentage point, opening up space for further monetary policy easing," the survey said.
Reserve Bank had projected CPI inflation at 8 per cent by January 2015 and 6 per cent for January 2016.
The momentum of food prices has declined even more and it is at levels below overall inflation, the survey said, adding going forward this is likely to persist.
Crude oil prices are expected to remain benign in coming months, and it will be about 29 percent lower in 2015-16 compared with 2014-15 (USD 59 versus USD 82).
"Global demand will remain soft because of slow growth in major areas of the world economy, including China and Europe," it added.
Besides, oil prices, India's inflation will be shaped by pressures from agriculture, foreign and domestic front.
If the falling trend in wage growth, which has declined to about 3.6 percent from over 20 percent, continues it will help further moderate inflationary pressures, it added.
On inflation expectations, the Economic Survey said it will be increasingly be anchored at more reasonable levels, moderating wage setting.
As per RBI's survey of inflation expectation, it has been stubbornly persistent and at levels, well above actual inflation.
Presenting Outlook and Challenges Ahead on prices, the survey said inflation is not expected to rise significantly from current levels.
Rationalisation of subsidies and better targeting of beneficiaries would generate part of resources for public investment, it added.
There is an ample opportunity to increase production by bridging yield-gap to the extent feasible within climatic zone and every effort should be made to bring states on board for creating national common markets for agricultural commodities, it added.
The Indian economy, the Survey said, appears to have gone past the slowdown, persistent inflation, elevated fiscal deficit, slackening domestic demand, external account imbalances and oscillating value of rupee.
Saying that inflation has been on a downward trajectory between April-December, it projected the consumer price inflation at 5-5.5 percent for 2015-16.
The declining inflation and a significant improvement in current account deficit (CAD), which is expected to come down to 1 percent of GDP in 2015-16, have made India an attractive investment destination, it said.
Private investments must remain the primary engine of long run growth, the Survey emphasised, adding that "public investment, especially in the Railways, will have to play an important role at least in the interim, to revive growth and to deepen fiscal connectivity".
In a separate chapter on 14th Finance Commission, the Survey quoted both first Prime Minister Jawaharlal Nehru and current PM Narendra Modi, to emphasise that adoption of FFC recommendation and creation of NITI Aayog would promote government's cooperative and competitive Federalism.
Recalling the golden rule of fiscal policy, it said the government should borrow to finance investment and not to fund current expenditure. It urged the government to bring down fiscal deficit to 3 percent of GDP.
Referring to subsidies, it said they were estimated to be Rs 3.78 lakh crore or 4.24 percent of the GDP.
"They (Subsidies) may not be the government's best weapon for fighting poverty," it said, adding that often rich households benefit more from subsidies than a poor one.
The Survey said the adoption of JAM number Trinity -- Jan Dhan Yojana, Aadhaar and Mobile -- would help in delivering subsidies to the poor in a targeted and less distorted manner.
Dwelling on the issue of manufacturing versus services, it said, "both are equally important in the Indian context... Similarly 'Skilling India' is no less important and deserves an equal importance as the other important goal of Make In India".
It, however, expressed satisfaction that the number of stalled projects have plateaued and called for revitalising public private partnership model of investment to boost investment.
