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Plot gets murky in growth story

A high rate of inflation could have a significant bearing on the economy’s overall growth as it would curtail nationwide demand for manufactured items and slow investment growth, reports Gaurav Choudhury.

india Updated: Apr 11, 2008 22:17 IST
Gaurav Choudhury

A high rate of inflation could have a significant bearing on the economy’s overall growth as it would curtail nationwide demand for manufactured items and slow investment growth, economists said on Friday.

“It will certainly affect demand and eventually, growth of the broader economy,” said TK Bhaumik, chief economist at Reliance Industries Limited.

After growing at a blistering 9.6 per cent in 2006-07, government’s own estimate for gross domestic product (GDP) growth has come down to 8.7 per cent in 2007-08. Economists now believe that the rate could fall further as policy focus shifts from fuelling growth to reining in prices.

Besides, fears of a possible recession in the US could worsen matters further. The Prime Minister’s Economic Advisory Council headed by former Reserve Bank of India (RBI) governor C Rangarajan had projected an 8.5 per cent gross domestic product (GDP) growth for India in 2008-09.

“High rates of inflation would have a bearing on the India growth story. It would also depend how long the situation of high inflation persists,” said DK Joshi, principal economist at credit rating and consulting firm Crisil Ltd.

It is not India alone where authorities are battling to keep growth on track while reining in prices. Governments and policymakers across the world are confronting the same challenge on the back of a sustained spike in global commodity prices and growing fears of a recession in the US.

While India’s wholesale price-based inflation rate rose to a worrisome 7.41 per cent in the latest week, China's headline inflation rate accelerated to 8.7 per cent in February, the highest in 11 years. In the US, inflation is forecast to hit 3.5 per cent during 2008.