Hopes for a broad-based turnaround in the Indian economy has sprung anew, but the spectre of rising inflation has muted cheers in the world’s the second-fastest growing economy.
India’s gross domestic product (GDP)—the sum total of income of all economic entities — will grow at 7.2 per cent in 2009-10, an official forecast said last week, confirming signs of a cheer in the domestic economy.
A drought-related surge in prices, however, remains the biggest worry for Finance Minister Pranab Mukherjee and his team as they begin the final stretch of the tightrope walk that is Budget 2010: to contain prices without hurting growth.
Food inflation is hovering around 18 per cent pummelled by a supply crunch in staples such as rice, pulses, vegetables and sugar.
This has forced the government to shore up supplies of several commodities, but high global prices have queered the pitch.
For Mukherjee the temptation to battle rising food prices through demand compression is strong as food inflation threatens to spill over into higher prices of manufactured products.
“We believe durable goods prices and core inflation are on a clear uptrend and think the rise in manufactured goods prices is strong enough to offset any declines in food prices,” Rahul Bajoria of Barclays Capital said in a research report.
The Reserve Bank of India (RBI) has kept interest rates on hold, but announced measures to draw off liquidity from the system to tame prices. It has raised its forecast of wholesale price index (WPI)- based inflation to 8.5 per cent by end-March 2010.
“The emerging growth-inflation trade-off is an important input in deciding the pace, nature and timing of (stimulus) exit strategies,” said Rajeev Malik of Macquarie Securities.
The government has been slow to utilise buffer stocks to lower prices despite having excess foodgrain supplies in its coffers.
In 2002-03, last major drought before this year, total foodgrain output fell by 18 per cent, but food inflation was contained at below 2 per cent primarily by timely and aggressive offloading of buffer stocks by the government.
“As the economy is recovering and demand is picking up, firms may be pressured to pass on higher costs to consumers,” the Confederation of Indian Industry (CII) said.