Hopes for a broad-based corporate recovery have sprung anew with strong advance tax collections from the country’s leading firms, but rising inflation could apply the brakes on a nascent recovery as policy makers grapple with options to sustain growth amid rising prices.
A slew of recent data has shown strong signs of an economic recovery in recent months. The economy grew 7.9 per cent during the July-September period — its strongest in six quarters — on the back of higher consumer spending and private investment.
At 10.3 per cent growth in October, the country’s industrial output has grown at a pace second only to China where factory output grew at 19.2 per cent in November. But food prices in India have accelerated by 19 per cent in a year stung by a supply crunch in staple items following one of the worst droughts in the last 40 years.
The drought-related surge in food prices has been the key driver for inflation over the last few months.
The government will have to carefully walk the wedge between the spectre of rising prices and the green shoots of economic recovery.
“Prices are a major area of concern. We shall have to address it and we are doing it,” Finance Minister Pranab Mukherjee said in the Rajya Sabha replying to a debate on the Appropriation Bill for supplementary demands for grants.
The economic downturn had forced the RBI to cut interest rates to record lows but economists say the surge in inflation could prompt central bank to shift to a tighten monetary policy.
“The emerging growth-inflation trade-off is an important input in deciding the pace, nature and timing of exit strategies,” said Rajeev Malik of Macquarie Securities.
Industry has been unequivocal in stating that any withdrawal of the stimulus package could upset growth.
“Any reversal of soft interest rate stance will hit the growth momentum and bring down industrial performance,” said Harshpati Singhania, president of industry chamber Federation of Indian Chambers of Commerce and Industry (Ficci).
All eyes are on the RBI now on when it announces measures to suck out liquidity from the system as focus shifts to controlling inflation.
“We expect the policy rate hiking cycle to start in January,” said Sonal Varma, of Nomura Financial Advisory and