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Taming inflation Pranab's primary concern

Ashok Dasgupta

NEW DELHI: Having weathered the impact of the global financial crisis exceptionally well over the last two years with high growth rates next only to China, the Indian economy is now at the crossroads. Even as the country's gross domestic product (GDP) expansion during 2010-11 is expected to touch 8.50-8.75 per cent, according to official and various other estimates, and the basic economic fundamentals are robust enough to strive for a double-digit growth next fiscal, such rosy projections may not be on top of Finance Minister Pranab Mukherjee's mind at the moment.

With the presentation of the Union Budget for 2011-12 due in just over a week from now, Mr. Mukherjee's major worry is the unexpectedly high inflation which has remained obstinately well over the “comfort zone” for the major part of the current fiscal. So much so, that the Reserve Bank of India was forced to revise its tolerance limit for headline inflation upwards to seven per cent from 5.5-6 per cent projected earlier. While the overall wholesale price index-based inflation for January stands pegged at 8.43 per cent, food inflation, though on a declining trend of late, remains way higher at over 11 per cent as per the latest WPI data for the week ended February 5.

What is worse, the runaway increase in food inflation, unlike as in previous years, is not so much due to higher prices of cereals, pulses or edible oils but due to unexceptionally high prices of onions, fruits, milk and protein-based items like eggs, meat and poultry over which the government has no control. More worrisome is the well-known fact that the WPI inflation data released by the Central Statistical Organisation are just provisional estimates and almost certain to be marked up in final revision. It may be a mere coincidence that the switch-over from WPI to the more globally acceptable consumer price index (CPI) has pegged the rural and urban combined inflation at six per cent although rising prices continue to burn a hole in everyone's pocket..

As in 2007, for the Congress-led UPA government in its second term, the inflationary surge could not have been timed worse. At a time when global commodity prices are on the rise and crude oil is also inching upwards by the day owing to uncertainties in Egypt and the Arab world — over which the government has no control — elections are also due in five States, including Tamil Nadu, West Bengal and Kerala during April-May. No gainsaying that unless the government by then is able to tame the inflationary spiral which is severely hurting the aam aadmi and the poorer sections the most, the fortunes of the ruling coalition are likely to be seriously dented in the state hustings.

During the current fiscal, the RBI did step in periodically to douse inflationary expectations and raised its key short-term lending and borrowing (repo and reverse repo) rates more than half-a-dozen times as part of the stimulus exit strategy but the impact has been marginal as monetary measures are not a complete recipe for containing prices. For the Finance Minister, therefore, instead of devising ways and means of catapulting the economy to the higher trajectory, his task is likely to remain limited to containing the price spiral while compensating the people for the higher spending.

At the same time, Mr. Mukherjee will have to ensure that the measures to stem inflation do not unduly hurt the overall economic growth. In effect, he will have to maintain a delicate balance between checking inflation and sustaining growth during the terminal year (2011-12) of the 11th Plan so that the economy is well poised for higher growth in the first year of the 12th Plan with the launch of the Direct Tax Code (DTC) and the Goods and Services Tax (GST) to usher in a new era in both direct and indirect tax regimes.

But for the spectre of inflation, the budgetary exercise for achieving higher growth perhaps would have been possible this time itself. For, having achieved remarkable recovery from the meltdown, India is being showcased by developed countries as a major growth engine. Industrial growth has seemingly slackened a tad but that is likely to be made up by higher farm and services sector growth. Exports have picked up well over the last few months, the country's foreign exchange reserves are comfortable and both the savings rate and the investment rate are at 34 and over 36 per cent of the GDP, respectively.

All these aspects taken together — along with its vast market which largely remains unexplored in rural areas — India presents itself as a very attractive investment destination in all sectors of the economy, be it infrastructure, retail trade, automobiles are consumer goods. Clearly, development of world-class quality infrastructure holds the key for a step-in to a double-digit growth in the coming years. But of late, the environment appears to have vitiated in the foreign investor's eye owing to two stark negatives that have raised their ugly head. One is the series of scams, be it the CWG, housing, 2G and the ISRO-Devas deal, which now stands annulled. The other is the issue of black money that has been the topic of intense debate.

Evidently, one budgetary exercise is not enough to rectify all the ills but the government has to be seen to be alive and forthright in dealing with such issues, lest they project a negative image globally. The need of the hour, therefore, is reforms in various sectors of the economy and governance.

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