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FM walks a tightrope

Finance Minister Pranab Mukherjee had to think of ways to keep prices under check while moving on fiscal consolidation, sustainable growth and rollback of the stimulus package. See graphics

delhi Updated: Feb 27, 2010 02:32 IST
HT Correspondent

Finance Minister Pranab Mukherjee had to think of ways to keep prices under check while moving on fiscal consolidation, sustainable growth and rollback of the stimulus package.

“A major concern during the second half of 2009-10 has been the emergence of double-digit food inflation,” Mukherjee said in his speech.

The inflation rate rose to an alrming 8.56 per cent in January. The reason: Food prices continued to be under pressure due to the supply crunch in staple items such as potatoes, cereals and sugar.

“Since December 2009, there have been indications of high food prices, together with the gradual hardening of the fuel product prices, getting transmitted to other non-food items as well,” said Mukherjee.

Inflation in manufactured products, which touched 6.6 per cent, emerged as the latest worry for policy makers, as it indicated that the broader economy finally came under inflationary pressure.

Mukherjee said, “The first challenge before us is to quickly revert to the high GDP growth path of 9 per cent and then find the means to cross the 'double digit growth barrier'.”

Gross domestic product is set to grow by 7.2 per cent in 2009-10 even though the 2.8 per cent contraction in the drought-hit farm sector brought it down to 6 per cent in the third quarter ended on December 31.

From 2008-09, the GDP growth rate started slowing down and touched 6.7 per cent after growing at a close to 9 per cent rate for four straight years. The spell was broken by the global recession resulting from the US financial crisis.

Now, Mukherjee said that the government needed to review the stimulus package and move towards fiscal consolidation that facilitated the growth in the pre-crisis five years.

“We need to make growth more broad-based and ensure that supply-demand imbalances are better managed,” the FM said even as he announced a two-percentage point hike in excise duty for most manufactured goods.

Mukherjee is banking on the fact that the personal income tax benefits and the resultant expendable money will spur consumer spending again and set the economy on the high growth trajectory.

On the flipside, the budget banks more on consumption than investment to drive growth. There are uncertainties about the global economy. If the recovery turns weak, some of Mukherjee’s calculations may just go awry.