Fiscal and monetary measures being taken to combat inflation would impact growth in the Indian economy's key areas, particularly infrastructure, as rising input costs and costlier borrowing would delay critical projects, Tata group chairman Ratan Tata has said.
"Fiscal policies to control inflation will affect access to credit and could slow down investment levels and consumer demand," Tata said in the latest annual report of group firm Tata Steel. "The most significant impact will be from the slowdown in major infrastructure projects in the areas of road construction, mass transit systems, power generation and investments in primary industries, where financial closure, right-of-way permissions and land acquisition could present major delays."
Inflation rate is galloping towards double digits — it was 9.44% in June — and there are strong sings of an imminent industrial slowdown after factory output plunged to a nine-month low of 5.6% in May.
This has presented policy makers with a harsh dilemma: the string of measures to cure inflation has not tamed prices but yet cast side-effects on growth.
The Reserve Bank of India (RBI), which will present its quarterly monetary policy review on July 26, has raised the repo rate — the rate at which banks borrow from the RBI— by 10 times in the past 16 months to cool prices.
A higher repo raises banks' borrowing costs, which in turn increases interest rates on final home, auto and corporate loans.
Delays in projects "would have a major impact on job creation and the demand for goods and services, resulting in a substantially lower level of economic activity in the country compared to past years," Tata said.
Though the Indian economy had done well in 2010-11, the years ahead could be challenging as the government endeavours to curb inflationary growth, he said. "Energy costs, reflecting higher prices of crude oil and gas as well as the shortfall in the availability of gas and electrical power will, in themselves, have a devastating impact on the country's competitiveness and its ability to sustain the high growth rates it enjoyed."