New Delhi: India needs to tighten monetary and fiscal policy further to control inflation and sustain growth, the Organisation for Economic Cooperation and Development (OECD) said in a report on Tuesday.
The group of 34 industrialised countries also warned India’s rising oil subsidy bill could see the government miss its fiscal deficit.
The Reserve Bank of India (RBI) has raised interest rates by 250 basis points since March 2010, in nine moves, but has failed to kill off inflation that remains stubbornly high.
The headline inflation accelerated to 9.06% in May from 8.66% a month ago on higher manufacturing prices.
The OECD report says high inflation has made real interest rate negative despite a series of rate hikes.
“With the economy now back on a high-growth trajectory with limited slack, further incremental tightening is needed to ensure inflation moderates,” it said.
High inflation is seen slowing down Asia’s third largest economy by pushing up credit costs and weakening consumer demand. The economy grew at its slowest annual pace in five quarters in January to March.
Analysts have blamed New Delhi’s loose fiscal policy in the wake of the global downturn for high inflation. The government has only partially rolled back its stimulus.
New Delhi plans to narrow its fiscal deficit to 4.6% of the GDP in the current fiscal year to end-March 2012, after revenue windfalls from the sale of third generation spectrum and wireless helped it keep the deficit at 4.7% last year.
However, several analysts have questioned the government’s target in the face of a slowing economy and high oil prices.
The OECD, too, believes a higher pay out for oil subsidies following the rise in global oil prices may see India missing its deficit target.
“Tight control will need to be exercised over spending, given that in the past few years there have been consistent over-runs in budgeted outlays,” it said.
“Hence, a steadfast commitment to spending restraint will be essential for the government to meet its target.”
New Delhi has budgeted a fuel subsidy bill of $5.2 billion for 2011/12, assuming oil prices below $100 per barrel. Oil prices are currently near $120 a barrel.
Analysts say an increase of $10 a barrel in oil prices has the potential of increasing the fiscal deficit by around 0.2% of GDP.