Mumbai: Reserve Bank Governor Raghuram Rajan on Tuesday said even though an increase in power prices to improve the health of discoms would hurt us in the short-term, it is a sound move for inflation management in medium-term.
"I would say short run effect (of increase in tariffs) would probably be more inflation, medium run would actually mean lower inflation," Dr Rajan told analysts during a concall while answering a specific query on any upside risk from possible tariff increases by the power discoms.
To illustrate, he used the example of petroleum subsidies.
"Because effectively not passing through the full price of the electricity is on the one hand encouraging consumption which then creates some shortage and creates a fiscal deficit which then effectively implies more spending.
"On the other hand if prices are increased then the fiscal deficit reduces and the consumption will also become more moderate and appropriate freeing up supply for other more demand," he said.
It can be noted that power discoms in at least four states are in poor financial conditions due to a variety of reasons, including populism. There is a move to get them out of the dire times by raising prices for consumers.
On GST, Dr Rajan said it will be done this year and ready to roll by March 2016 but said it presents a mixed bag for inflation management.
"It may be that there is better collection of some of the taxes and they go in to increase the price of commodities," he said.
"So, on one hand we have efficiency which will reduce the cost in terms of logistics, which may have some offsetting effect and then if there is more production and better unified markets in India it will bring down prices," Dr Rajan said.
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