The UPA government and the Reserve Bank of India (RBI), which successfully steered the economy through the world's worst economic crisis in eight decades now face a harsh dilemma: prices are not under control but the war against inflation is hurting growth.
India's economy grew at 8.5% in 2010-11, higher than last year's 8% growth, data released on Tuesday said, but in the January-March quarter GDP grew by only 7.5%, the slowest in five years.
This is linked to rising interest rates under the RBI's money squeeze, which has curbed spending and choked demand that fuels growth.
The RBI, in its annual policy review, pegged the real GDP growth rate for 2011-12 at 8% - down from the estimated 8.6% growth in 2010-11. This is almost 1 percentage point lower than the government estimate of 9%.
Finance Minister Pranab Mukherjee curtly admitted to the hard choice.
"Growth would suffer if inflation continues to remain high," Mukherjee said.
The government will likely announce downward revision of this year's growth projection.
"We are going to scale it (growth projection) down. Oil prices are remaining as they are, they are not showing signs of going down,," said R Gopalan, economic affairs secretary. A senior government aide said GDP growth projection may be revised down to 8% from 9%.
The average inflation in 2010-11 was 9.4% - the highest in 16 years. With no sign of let up, the government is worried. But it has raised government-guided petrol prices in a bid to control subsidies, while diesel is up next.
"Growth is expected to moderate to 7.5% in FY12 owing to a combination of monetary tightening and the disappointment over the strength of the investment upturn," said Rajeev Malik, senior economist, at broking and research firm CLSA Singapore.
The government expects the average annual inflation for 2011-12 to be between 7.5% and 8% amid spiraling prices in a slew of vital commodities including oil.