The economy has been losing steam throughout the previous financial year and the small acceleration over 2009-10 — 8% to 8.5% — was helped along by farm output recovering after a drought year. The slowdown in industry and services, brought home with telling effect in the data for January-April 2011, is resulting from sustained high inflation that emerged in food prices and then fanned out across the economy. The central bank’s attempts to bring prices to heel are adding to the ebbing momentum as government spending has not slowed enough. And although the trade gap has shrunk appreciably between 2009-10 and 2010-11, it continues to be above 5% of GDP as international oil prices climb towards the record highs they had reached before the sub-prime crisis spread to most parts of the globe. The gloom is here to stay. The forces that are on display in the latest GDP data set are yet to play out fully. There is more pain up ahead.

The global financial meltdown occurred when India was well into an expansionary spending mode and all the government needed to do was expand it a bit more. The swift recovery, however, needs a reversal of the fiscal stance, a far more difficult proposition. The Centre’s spending in 2010-11 overshot initial estimates by 9.72%, yet the budget for 2011-12 pencils in a mere 3.38% growth. Last year’s profligacy was camouflaged by a bonanza from the sale of radio frequencies for mobile telephony. Since the 2011-12 allocations for welfare and infrastructure are up by 17% and 23%, respectively, and account for nearly 30% of total government expenditure, greater control is called for over revenue spending if the government’s ambitious deficit reduction targets are to be met. The Centre’s anticipated borrowing requirement of Rs3.43 lakh crore in 2011-12, significantly lower from two years ago, however, remains significantly large to crowd out loans to the private sector at a time when interest rates are climbing.

As India is about to embark on its Twelfth Plan, there was hope the target growth rate for the five years beginning 2012 could be an awe-inspiring 10% annually. With a conservative estimate for inflation at 5% a year over the period, a $2 trillion economy would weigh in at $4 trillion by 2017. That could make it the fifth largest economy in the world trailing the US, China, Japan and Germany. But if the economy grows 8.5% in 2010-11 and thereabouts or less in the terminal year of the Eleventh Plan, the average for 2007-12 is closer to 8% than the target 9%, making 10% growth that much more distant.