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High inflation may hit growth

business Updated: May 06, 2011 01:32 IST
Mahua Venkatesh
Mahua Venkatesh
Hindustan Times
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Brace yourself for a prolonged spell of high prices. For, the government expects a 7.5-8% average annual inflation in 2011-12 against 5% projected in the budget due to hikes in prices of vital commodities, such as oil.

It will also affect the gross domestic product (GDP) figure, bringing it down to 8% from the projected 9%.

Finance minister Pranab Mukherjee said on the sidelines of the annual Asian Development Bank conference in Vietnam on Thursday that the government was worried because the average 9.38% inflation in 2010-11 - the highest in 16 years - had been showing no sign of a let-up. http://www.hindustantimes.com/images/HTPopups/060511/06_05_11-metro-1d.jpg

He said high food and commodity prices were making most manufactured goods dearer, while crude prices were hovering above $110 (Rs 4,470) a barrel.

"If we raise petrol and kerosene prices, there could be social tension. And if the subsidy is increased, it would affect the fiscal deficit target."

The high price levels will hurt the economy's expansion and the projected 9% growth in GDP appears increasingly unlikely.

"It may come down to 8%," Mukherjee said.

The RBI raised the repo rate - at which banks borrow from the central bank - by 0.50% to 7.25% to cool prices.

A higher repo will raise banks' borrowing costs and prompt them to increase the rates on home, auto and corporate loans.

The high costs of credit and input price pressures have also slowed down industrial activity, as companies defer their capacity expansion. This could hurt overall economic growth.

"If prices are to be addressed, we have to mop up excess liquidity (from the banking system)...but I hope it does not impact liquidity for productive purposes," Mukherjee said.

Chief economic adviser Kaushik Basu indicated that the government would revise the growth forecasts.

"All over the world, there have been revisions ... We, too, might go in for a revision," Basu told reporters in New Delhi.