Looks like no amount of aggression by Central bank will be enough to tame inflation. There are high chances that the GDP growth rate in the coming years will be knocked off by some points on account of inflationary pressures. As per Mr. Rangarajan, the Chairman of Economic Advisory Council, a push to growth rate beyond 9.5% in the 12th plan (2012-16) will lead to higher inflation and current account deficit. It's a catch 22 situation since a slow paced growth will mean less jobs and no wealth reaction. And as a third component, the fiscal deficit enters the scene, the game only gets tougher.
As far as fiscal deficit is concerned, while the government managed to score decent last time, there seems to be no end to such tough targets. At 4.6%, the goal for fiscal deficit looks ambitious, especially after the recent duty cuts on fuel products that will lead to a revenue loss of Rs 490 bn. However, it is not revenue, but the expenditure side that the Government is concerned with. While the ratio of savings and investments at 36% and 38% respectively may help GDP to grow at 9%, there are other issues to be taken care of like inflation, a reasonable current account deficit and fiscal consolidation.
And these are not the only challenges in the way of growth. The growth needs to be sustainable and all inclusive as well. To serve that end, we need to have at least a 4% growth in agriculture and an even higher growth in power and infrastructure sectors.
With all these challenges, the Government's intent to set a floor of 8% growth for the current year is quite laudable. And with monsoons playing a favorable role, growth could be anywhere between 8-8.5%.
While that is what we intend to achieve, we all know that more often than not, the achievements have fallen short of expectations. So is there a visible silver lining in the dark cloud? Well yes. Poverty in the country is on the decline as is evident from statistics like decline in migrant laborers, rise in rural wages and non availability of domestic help. Also, the food price inflation is showing signs of softening and is expected to come down further by March 2012.
To conclude, there is no such thing as a free lunch. While striking a fine balance between inflation, growth rate and fiscal balance might lead to a little slowdown in the near term, it will ensure that the long term health of the economy remains intact.