in the context of the us fed ’ s announcement in december 2012 that it will maintain its current easy monetary policy stance “ as long as the unemployment rate remained above 6. 5 per cent ” provided inflation is only slightly above its target and long - term inflation expectations remain anchored. this has raised a question about whether the fed has accepted 6. 5 per cent as the new normal for unemployment. it has raised an even more important question about whether 6. 5 per cent unemployment is, in fact, an underestimate in which case the fed would run the risk of maintaining its easy stance for far too long, thereby stoking inflation. new normal – counter arguments 35. let me now put across the reserve bank ’ s assessment and position on each of the arguments for new normal as summarized earlier. ( i ) wage - price spiral cannot sustain indefinitely 36. the thrust of our response to the wage - price spiral argument is that even if inclusive growth policies, liberal fiscal entitlements and heightened inflation expectations – driven primarily by food inflation – trigger a wage - price spiral, it cannot be sustained in the absence of an accommodative monetary policy. admittedly, wage pressures, unaccompanied by productivity increases, start off as demand shocks, but soon transform to act more like supply shocks. 37. like any other supply shock, exogenously imposed higher wages can be inflationary in the first round, but the bargaining power of labour will erode in time, and the necessary adjustment will take place to bring wages back in line with productivity levels. the recent high growth in rural wages also reflects a catch up with minimum wages, a necessary adjustment intended by the government. after the initial catch - up, however, wage growth cannot be sustained without corresponding productivity increases. if not, firms will gradually lose their power to translate higher input prices to higher output prices, inevitably leading to a correction in the wage pressures. 38. furthermore, we must recognize that the government does not have the fiscal capacity to continue entitlements and welfare programmes at this level. the government ’ s embrace fiscal responsibility will act as a self - limiting check on the wage - price spiral. ( ii ) commodity price shocks are unlikely to persist 39. even as the arguments in support of continued upward pressure on global commodity prices are compelling, there are some credible arguments to the contrary, drawing mainly from an alternate energy scenario going forward. the global energy scenario will change on three dimensions – efficiency, demand

the modalities for setting up of the fund were subsequently discussed in the state finance secretaries conference. viii. ways and means advances to the state governments the reserve bank of india ( rbi ) has been extending ways and means advances ( wma ) to the state governments since 1937, under the provisions of section 17 ( 5 ) of the reserve bank of india act, with the objective of covering temporary mismatches in cash flows of their receipts and payments. according to the act, such advances are repayable not later than three months from the date of making that advance. the maximum amount of such advance by the rbi and the interest charged thereon are, however, not specified in the rbi act but are regulated by voluntary agreements with the state governments. at present, rbi is the banker for 26 states ( i. e. barring jammu & kashmir and sikkim ) and the union territory of puducherry. there are two types of wma viz., ( i ) normal or clean advances, which were introduced in 1937 ; and ( ii ) special or secured advances, instituted in 1953, and which are provided against the collateral of government of india securities. state - wise limits in respect of normal and special wma are fixed based on certain parameters ; these limits have been revised periodically over the years. an overdraft ( od ) occurs whenever these limits are exceeded. maximum time - period ( days ) and / or financial limits for which state governments can remain in od have been specified ; these limits have also been revised periodically. payments are suspended on behalf of the state governments in case od limits are breached. in view of the significant improvement in the cash position of the state governments, the normal wma limits which were raised periodically – usually on an annual basis – have been retained at the level prevailing since 2006 - 07. the wma limits for 26 states and the union territory of puducherry stand at rs. 9, 925 crore. ix. global financial crisis and the way forward fiscal outturn the consolidated fiscal position of the state governments witnessed significant improvement in the recent years reflecting the higher share in central transfers as a follow - up of the recommendations of the twfc, states ’ own efforts at revenue augmentation, rationalisation of revenue expenditure and the cyclical upturn in the global economy that had a ripple effect on state finances. states recorded a revenue surplus of 0. 6 per cent in 2006 - 07 for the first time since