It's inflation versus growth rate again. This time, the inverse relation is even stronger, as macro economic conditions deteriorate. The GDP for the first quarter came at 7.7%, and as per FICCI, we should not be surprised if it further slips to 7.5%. The gravity of the situation can be assessed from the fact that fiscal deficit during 2QFY11 worsened to 55% of the annual budget estimate, as compared to 24% last year accompanied with slippage on the revenue side as well. That means that we are no better than the US when it comes to maintaining fiscal discipline.
The Indian economy seems to be taking a hit from all the directions. The manufacturing sector has slowed down. The outlook for the agriculture sector looks gloomy due to an unfavorable monsoon forecast. To make things worse, the service sector, which accounts for more than 50% of the GDP, will suffer slowdown in exports, especially in the software segment.
In such a scenario, hiking interest rates will slow the engine of the Indian economy. But does the Government have an option? Well, as per FICCI, these are the times to experiment with supply side measures. Since food inflation is the prime culprit, allowing free movement of commodities could be a solution. This will require a major reform in the Agricultural Produce Market Committee (APMC) mechanism. Under the current system, the farmers have to sell their produce to agents or traders under supervision of the APMC. This makes them vulnerable to traders' and marketing agents' price manipulations. And this is just one of the multiple reforms waiting to be undertaken. The other beneficiary could be the retail sector. It's time to go for FDI in multibrand retail as it will spur up investments and spruce up logistics.
To conclude, the need of the hour is to work on supply dynamics to ease inflationary pressure without sacrificing growth. This will require a flexible business environment that can facilitate investments, not to mention the various regulatory reforms waiting for the light of day.