Policy dilemma: price control vs growth boost

The International Monetary Fund has projected that Indian economy would grow by 9.4 per cent in 2010 buoyed by healthy profits of corporations, but economists warned that rising demand could stoke inflation presenting macroeconomic managers with the challenge of containing prices without hurting growth. Trade-offs ahead

The International Monetary Fund (IMF) has projected that Indian economy would grow by 9.4 per cent in 2010 buoyed by healthy profits of corporations, but economists warned that rising demand could stoke inflation presenting macroeconomic managers with the challenge of containing prices without hurting growth.

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As inflation rate galloped into double digits — it was 10.16 per cent in May — the Reserve Bank of India (RBI) last week announced a hike in two of its key rates to tame prices.

Food prices remained firm and have spread into core inflation, or prices of goods other than food and fuel.

“Manufacturing inflation is inching upward and this is worrisome, reflecting a demand pressure,” said D.K. Joshi, chief economist of Crisil.

Recent data has confirmed rising domestic demand.

The country’s industrial output grew by 17.6 per cent. Capital goods output have recorded a healthy growth in the last few months, mirroring rising investment activity.

As the economy picks up pace, demand for such goods are expected to rise that would fan inflation.

Rajiv Kumar, director and chief executive, ICRIER, said the growth in manufacturing would push demand bolstering the possibility of a further hike in interest rates..

RBI said the recent increase in fuel prices will have an immediate impact of around one percentage point on wholesale price index based inflation, with second round effects being felt in the months ahead.

A lot will still depend on an adequate monsoon that would help tame food prices. But it will also raise demand for goods with rising rural income.

N.R Bhanumurthy, an economist with the NCAER, said: “A good monsoon will create demand especially for sectors like consumer durables."