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What can Govt do to bring inflation to heel?

Economists are grappling with policy dilemmas as they struggle to contain prices and maintain high growth amidst high global commodity prices, reports Arun Kumar and Gaurav Choudhury.

business Updated: Apr 04, 2008 23:23 IST

Macro-economic managers are grappling with policy dilemmas as they struggle to contain prices and maintain high growth amidst high global commodity prices.

The government, which faces elections in about an year’s time, has attributed the rise in prices to high global commodity prices and said that the government is willing to take fiscal steps to contain the price line.

Economists expected high inflation rates to persist for a few more months and felt that the Reserve Bank of India (RBI) could announce an interest rate hike in its monetary policy to be announced later this month.

Reserve Bank of India (RBI) governor YV Reddy has said that economic managers face an “acute policy dilemma” due to rising food and energy prices and said that containing inflation was a high priority.

RBI has raised benchmark interest rates several times to contain inflation by sucking out excess liquidity from the system.

The Asian Development Bank expects that inflationary pressures in India to persist for the next few months, and recent import duty cuts on food items to have some impact on prices after 2-3 weeks.

Narhari Rao, the bank's India economist, said on Wednesday that he did not expect the central bank to ease policy before a drop off in inflation.

On Monday the government scrapped import duties on crude edible oils and banned exports of non-basmati rice as it announced a slew of measures to stem rising inflation.

"Inflation is beyond anybody's expectations and I expect further firefighting measures from the government," said DK Joshi, principal economist at Crisil.

“Such a high inflation will have a detrimental effect on the economy and industry. We do expect slow down in economy and rise in the interest rate,” said Asit Kotecha Chairman ASK Group.

Hardening of interest rates, however, had an impact on industrial production. Industrial output growth in January registered a 10-month low of 5.3 per cent against 11.6 per cent in the same month last year largely because of an unexpected decline in capital goods and a continuing downtrend in consumer durables.

There are signs of a fall in the broader economy’s growth rate. After growing at a sizzling 9.6 per cent in 2006-07, early estimates pegged India’s gross domestic product (GDP), in 2007-08 at 8.7 per cent.