Breach of fiscal deficit target will have implications: RBI

Mumbai: The fiscal deficit target of 4.6% of the gross domestic product (GDP) in 2011-12 could be missed and this will have serious implications on inflation, reports PTI quoting the Reserve Bank of India (RBI).

“In 2011-12, developments so far indicate that the fiscal deficit target of 4.6% of GDP could be breached which will have implications for domestic inflation.

“The moderation in private demand resulting from anti-inflationary monetary policy stance of the RBI will be partly offset by the expansion in public sector demand in terms of the size of the fiscal deficit,” RBI deputy governor HR Khan said.

“Shrinking value of money because of persistent high inflation explains the importance of anti-inflationary monetary policy,” the RBI deputy governor said.

Mr Khan said inflation within the threshold level would not mean erosion in purchasing power since higher growth would also raise the income levels, resulting in increased net purchasing power.

Comment : The govt is clueless as usual or are they? The RBI and govt are well aware, that a dramatic increase in the money supply leads to expansion of cheap credit, which in turn leads to high prices and NOT higher wages or greater purchasing power.

If a loaf of bread costs 30 bucks and it becomes 50 bucks, without my income increasing by 20 bucks, there is a decline in purchasing power. Even if my income increases my 20 bucks to compensate for the increase in the price of bread it has not led to true prosperity but only a devaluation of the currency.

This is classic Keynesianism at work;  print more money to increase prosperity. There could not be a worse approach to economic prosperity to alleviate poverty in India.

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