Policymakers’ Inflation Forecasts Hurt India's Credibility - Ahluwalia

Over-optimistic forecasts by policymakers predicting when India's stubbornly high inflation would ease have hurt the government's credibility, although price rises should moderate by the end of the fiscal year in March, a senior adviser said on Sunday.

Montek Singh Ahluwalia, the deputy head of the Planning Commission, said he expected headline inflation to ease to 7-7.5 percent by March on the back of monetary tightening by the central bank and easing global inflation.

He also said economic growth for the fiscal year 2011-12 would likely be about 7-7.5 percent, while it was not impossible that the fiscal deficit could swell to 5.5 percent, against the government's target of 4.6 percent for the year.

It's true that inflationary pressure is higher than what we had thought it would be, he said in an interview to the news channel CNN-IBN. It's absolutely true that we have been hoping that this would happen earlier and to that extent our credibility becomes questioned, he said of inflation moderating. By February you will have the January data and if it turns out that inflation is not coming down by then, then we really don't know what we are doing, he added.

Ahluwalia also said there was still no political consensus on opening up India's multi-brand retail sector to foreign direct investors. The policy, aimed at easing inflation and unclogging supply bottlenecks, may come before the cabinet next week, a senior government source has said.

Inflation in Asia's third-largest economy has stayed above 9 percent for eleven straight months, adding to the woes of Prime Minister Manmohan Singh's government as it grapples with graft scandals, rising interest rates and a slowing economy.

INFLATION TO MODERATE

The inflation reading for October was above forecasts at 9.73 percent as the cost of food and fuel rose. The rise was further evidence of the Reserve Bank of India's (RBI) inability to achieve a breakthrough in its fight against inflation despite 13 rate rises since March 2010.

The RBI has taken a number of steps. It's too early to say it's not having an impact, Ahluwalia said. All the research shows that monetary tightening takes at least 3-6 months.

The main opposition Bharatiya Janata Party (BJP) is gearing up to attack the government on inflation when parliament reconvenes on Tuesday. The issue could hurt the ruling Congress party, which counts on poor, rural voters as its base, as it gears up for major state elections in 2012.

Ahluwalia also appeared to dampen expectations of a quick decision to allow chains such as the world's largest retailer Wal-Mart Stores Inc to operate in the country with a majority stake. The policy has snagged for years on opposition from small retailers fearing big job losses.

While there has been a lot of consensus in my view in the government, there's been less of a consensus in the political class, he said. And therefore it's not surprising that they have a few more consultations and take a little bit more time.