THE annual inflation number has been released

THE annual inflation number has been released, and it is a moment for cautious optimism with the emphasis being on caution.

If official statistics are to be believed and there is some concern that technical changes made this fiscal year now understate price increases the consumer price index stood at 11 per cent this year, down from 13.7 per cent in 201011. Given the inflation in the mid-20s that persisted in the current government`s first year in office, the administration should be credited for bringing an alarmingly high number broadly under control. And in recent months it has successfully passed on reductions in global commodity prices to consumers. But the achievement also needs to be put into perspective. For one, much of the decline in inflation is due to global price declines, especially those of oil and certain food items, rather than improvements on the domestic front. And inflation still remains stubbornly in the double digits for the fifth year running, a reality borne out by the common complaint among citizens that even basic needs, including food, fuel,electricity and transport, remain hard to meet.

Even more worrying is the persistence of the fundamental issues behind this problem, which remain in place and are getting worse. The State Bank recently pointed out that inflation remains high because of continued, and continually increasing, government borrowing, itself a function of the growing fiscal deficit. And the new budget doesn`t inspire confidence that the required belt-tightening will take place, at least not before the next elections.

The recent expansion of the cabinet and the hike in salaries and pensions of government employees are just a couple of indications of how politics continues to trump sound economic management, even as the fiscal deficit for 2011-12 will likely come in at nearly eight per cent. Add to that a low tax-to-GDP ratio, electricity and other subsidies, and the losses racked up by public-sector enterprises, as well as a precarious external accounts position that is weakening the rupee and making imports more expensive, and the outlook for inflation doesn`t look bright.