technical adjustments to some components of the consumer price index ( cpi ) basket, particularly the adoption of a new billing system by the botswana telecommunications corporation. although overall inflation increased sharply in the second half of the year, an analysis of the inflation trend that discounts the impact of vat and other technical adjustments to data suggests that underlying inflation was around 6 - 7 percent for 2002, which was a little above the upper end of the bank ’ s policy objective for that year. a closer look at the sources of inflation in 2002 provides further support to the conclusion that, while headline inflation was influenced by vat and other price adjustments, the underlying rate was mostly contained. prices of almost all categories of commodities rose at a higher rate in 2002 compared to 2001 as had been expected, given the wide - ranging impact of vat. food prices, however, rose at a much faster rate than the average, due in part to drought conditions in the region. food price inflation rose from approximately 4 percent in december 2001 to over 14 percent by the end of 2002. this accounted for almost half of the rise in overall inflation during the year, and reinforces the view that, after taking account of the impact of vat and other exceptional factors, such as volatile food prices, underlying inflation was largely contained during 2002. the relatively moderate rise in underlying inflation was to some extent supported by a fairly benign inflationary environment in the world ’ s major economies. although all major economies experienced moderately higher inflation, mainly as a result of rising energy prices, especially oil, average inflation rose by less than 1 percentage point, from 1. 2 percent in 2001 to 2 percent in 2002. the inflation trend in south africa was somewhat different ; price increases were sharp, mostly due to the effects of the depreciation of the rand that had occurred towards the end of 2001. inflation in south africa was also affected by increases in food prices and labour costs. core inflation in south africa was 12. 2 percent in december 2002 compared to 5. 8 percent at the end of 2001. the combined effect of all these developments was that average inflation of botswana ’ s trading partners rose from 4. 2 percent at the end of 2001 to 8. 4 percent at the end of 2002, and was reflected in a rise in the cost of imports. in this connection, it should be pointed out that botswana ’ s inflation briefly fell below that of trading partner countries in the middle of the year, although it was subsequently higher due to the impact of va

related to vertical and horizontal equity even as taking the process of fiscal consolidation further. state finance commission the constitution ( 73rd and 74th ) amendment acts, 1993 have respectively, accorded constitutional status to rural and urban local bodies as the third tier of government. the amendments provide for constitution of state finance commissions every five years. following the recommendations of the state finance commissions ( sfcs ) and taking into account the devolutions made by the central finance commission ( cfc ), the state governments are required to devolve resources to their local bodies. not all states have constituted sfcs. and a fewer states have submitted action taken reports ( atrs ) on the recommendations made by the sfcs as noted by the twelfth ( central ) finance commission ( twfc ). the twfc, inter alia, recommended that sfcs should follow a normative approach in the assessment of revenues and expenditure in order to arrive at the gap that may be considered by the cfc and that the principal recommendations of the sfcs may be accepted without modification as in the case of cfc. v. role of the reserve bank of india in sub - national finances the rbi has, over the years, closely interacted with the state governments in its developmental role – particularly in areas of development of agriculture, and small industries. the rbi was specifically entrusted with an important promotional role, since its inception, of financing agricultural operations and marketing of crops. in fact, the agricultural credit department was created simultaneously with the establishment of the rbi in 1935. study of state finances the reserve bank prepares and publishes an annual study on the state government finances. this is a unique study since it compiles, consolidates and analyses detailed data on the budgets of all the state governments. it also documents the policy initiatives on state finances and debt management by the state governments, the government of india and the reserve bank. the study has been well received by policy makers and academicians, both in india and abroad, and is an important reference document. model fiscal responsibility legislation the rbi played a facilitating role in the states ’ endeavour for rule - based fiscal reforms by providing the secretariat support to a group of state finance secretaries for preparing a model fiscal responsibility legislation for the states. the final report was submitted to the reserve bank in january 2005. the group recommended that the model legislation would generally follow the pattern of the central frbm act, and build upon the state fiscal responsibility legislations already enacted. the group also took into account