of cabbages. but, when an economy is hit by inflation, all the prices would rise simultaneously, so both carrots and cabbages seem to be equally profitable. this would confuse the producers who would now be unable to make any choice between the two products. hence, the much desired relative price change does not occur, when an economy has been hit by inflation. instead, the absolute prices start to change and such changes do not provide the price signals for allocating resources. fifth, continued inflation distorts the balance sheets of companies, especially the balance sheets of financial institutions. companies may record profits in nominal terms, but a large part of such profits are eroded in real terms by inflation. when profits are adjusted for inflation, companies would find that their performance has not been so spectacular as has been depicted by the amount of rupees they have earned. in fact, their real position has pushed them backward to a lower level. sixth, inflation very forcefully hits the vulnerable groups with a weaker bargaining power. such categories include housewives, students, pensioners and workers whose salaries are not linked to inflation. it would lead to continuous agitation by these groups creating social and political dissension. the country, instead of using its resources for investing in long term growth generating projects, would have to spend its energy and resources for solving such social issues. thus, inflation is the unrivalled public enemy number one. who should take the blame for inflation? it is ironical that practically everyone in the society should take blame for a continuously high inflation in an economy. this is because everyone, even in a very little measure, would have contributed to facilitate inflation to raise its ugly head. it happens when people of a country believe that they can have a higher standard of living without working harder or producing more. inflation in the long run is directly related to the amount of money which people would have for buying goods and services. when that quantity of money is in far excess of the quantity of goods and services, the general price level has to move up in order to facilitate the required volume of transactions. hence, the magic solution for keeping inflation in check has been the production of money exactly in line with the production of goods and services in the economy. any violation of this golden rule, for whatever the justifiable reason, would pave the way for the long run inflation to peep into the system. in this context, the central bank has an inalienable responsibility to take all the

rationalising the existing income tax structure ; the vat reforms ; and the improvements in tax administration are worthy achievements. further, the government expects to strengthen fiscal consolidation by revising the fiscal management ( responsibility ) act to include binding fiscal targets. this would institutionalize its commitment to fiscal discipline, which is essential given the country ’ s external debt dynamics and exposure to rating agencies and international capital markets. further, to institutionalise the autonomy of the central bank, it is vital to shield monetary policy from fiscal dominance. in this regard, a strong legal and institutional mandate for the central bank is expected to ensure a clear separation between monetary and fiscal policy as part of the transition to the fit. this requires phasing out of monetisation of fiscal deficits by the central bank. this will also pave the way to a deeper and liquid financial market which will be a catalyst for effective transmission of monetary policy actions of the central bank. we also see the proposed liability management act of the government as a prudent strategy. it allows the government to manage public debt in a more flexible manner. under this framework, the public debt manager would create a buffer fund to minimise the rollover risk of debt stock eliminating the necessity for the central bank to provide financial assistance to the government at the beginning of each year as per the current provisions of the mla. even more importantly, it will create the space to go beyond the government ’ s borrowing requirement in any given year to mobilise financing to address the current bunching of external debt payments from 2019. the government ’ s decision to earmark the proceeds of divestitures for liability management is also a very favourable development in this regard. meanwhile, the government ’ s commitment to reform state owned enterprises ( soes ) is commendable. in particular, automatic pricing mechanisms for fuel and electricity are expected to be introduced in march and september 2018, respectively. this will go a long way towards reducing the future financial losses of key soes and avoid large ad hoc adjustments in retail prices. not only will this be supportive of the effective conduct of monetary policy, but it will also have a positive impact on the balance sheets of both the government and the state banks. as we know, the central bank alone cannot manage inflation and inflation expectations in the economy. it cannot influence supply side factors affecting inflation. although monetary policy is effective in controlling demand driven inflation, the support of the government is essential in managing supply side pressures on inflation. in this regard,