14

Economic Survey 2014-15

relative to 2014. This will likely have a key impact

in moderating increases in domestic support
prices.7
The most dramatic structural change relates to wage
pressures. As shown in Figure 1.7, wage growth
has declined to about 3.6 percent from over 20
percent. If these trends continue, rural wage growth
can continue to decelerate, further moderating
inflationary pressures.
The third factor relates to inflation expectations.
Until recently, household surveys of inflation
expectation conducted by the RBI showed that
expectations have been stubbornly persistent and
at levels well above actual inflation. But in the most
recent survey they dropped by nearly 7-8
percentage points over all horizons (Figure 1.8).
If this change conveys some information, inflation

expectations will increasingly be anchored at more

reasonable levels, moderating wage setting.
In sum, the structural shift that was argued in the
Mid-Year Economic Analysis 2014-15 seems
well under way. Consumer price inflation which is
likely to print at 6.5 percent for 2014-15 is likely
to decline further. Our estimate for 2015-16 is for
CPI inflation to be in 5.0-5.5 percent range and
for the GDP deflator to be in the 2.8-3.0 percent
range. The implication is that the economy will
over-perform on inflation which would clear
the path for further monetary policy easing.
Trends in financial markets suggest that there has
been a gradual easing of deposit rates in recent
few months as yields on 10 year government bonds
have been falling consistently during this period
(Figure 1.9). Declining yields could trigger

Source: Labour Bureau.

The domestic production of oilseeds and pulses is likely to be below target, but greater imports could help dampen
inflationary impulses from this sector.
7