NEW DELHI: Even though the growth of the country's gross domestic product (GDP) this fiscal is set to touch a record new high of 9.2 per cent with its economic fundamentals stronger than ever before, Finance Minister P. Chidambaram is still a worried man.

His prime concern is the unexpected spurt in inflation to 6.73 per cent during the week ended February 4 from 6.58 per cent the previous week owing to a runaway increase in the prices of edible oils, pulses, fruits and vegetables and non-vegetarian items as also certain manufactured products.

More worrisome is the apprehension that the inflation data based on the wholesale price index released by the Central Statistical Organisation are just provisional estimates and, therefore, the final figure may well be revised to touch the seven per cent mark, as has been the trend of late.

The Reserve Bank of India's monetary credit tightening measures are yet to make an impact; worse, the Centre's fiscal remedies such as a reduction in import duties on essential commodities and capital goods have failed to rein in inflation, as is evident from the steady rise in prices.

Tough time

For the Congress-led United Progressive Alliance Government, the surge in inflation could not have come at a worse time, with elections round the corner in quite a few States.

Hemmed in by coalition partners which are out to batter the ruling party for being unable to contain the price rise, which seriously hurts the aam aadmi (common man) and, therefore, vote banks the most, all good work done by the Government in terms of growth and development during the year appears to have come to nought.

Sustaining momentum

For the Minister, who by now should have been giving finishing touches to his 2007-08 budget to present yet another developmental recipe for sustaining the momentum and catapulting the GDP growth rate to double digits, his major task stands reduced to curbing the price spiral, by taming the inflation rate to the "comfort zone" of 5.0-5.5 per cent at the earliest possible.

The dilemma before the UPA regime and Mr. Chidambaram is how to effectively tackle the highly sensitive economic equation. But for the spectre of inflation, which has raised its ugly head yet again after quite a few years, all economic parameters are conducive, if not heartening, to a further push to reforms to sustain the high growth momentum.

Savour this. Apart from the achievement of over nine per cent GDP growth rate for the second successive year, next only to China globally, India is regarded as the hottest destination for foreign direct investment (FDI). The expected FDI inflow during the current fiscal is the highest ever at $ 8.5 billion and the foreign exchange reserves are burgeoning in the region of $ 170 billion.

The growth rate in exports hovers at 22-24 per cent while the indices of the bourses touched new highs during the year.

As for the budget targets set for the current fiscal, revenue receipts are robust with collections by way of income tax, customs duties and service tax showing healthy trends.

But for the excise duty collections which grew by a mere six per cent till January 2007, the mop-up through corporate tax — owing to excellent results churned out by companies during the third quarter — and customs duties are set to achieve the budgeted targets.

The most spectacular increase was in service tax, by about 64 per cent during April-December 2006.

Evidently, with a higher than expected GDP growth, the target set for fiscal deficit this fiscal year is likely to be not only achieved but also exceeded. In the event, Mr. Chidambaram's task would have been to concentrate on sustaining the growth momentum through fiscal and other incentives along with easy and adequate availability of cheap credit and other inputs.

However, with the focus on checking inflation, he will have to walk a tightrope.

On the one hand, he will have to ensure an environment conducive to further growth in the manufacturing and other sectors. On the other, he will have to not only contain the price rise but also douse the inflationary flames through effective remedial measures.

The RBI has already taken certain restrictive measures. First, it raised the overnight lending (repo) rate to banks to curb the availability of cheap credit for personal loans and on credit cards, giving enough indication of a hike in interest rates which has already been effected by a number of public sector banks.

More recently, it raised the cash reserve ratio (CRR) of banks to suck out about Rs. 14,000 crore from the money in circulation for checking easy availability of credit.

Any further tinkering with credit availability, it is feared, may well curb inflation but result in throwing the industry into a recession.

And if that is even perceived as happening, the foreign portfolio investments in stock markets may witness an exodus. That's the thin line the Minister has to carefully tread.

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