Rising inflation may impede pace of recovery: OECD

With inflationary pressures building up at the initial stages of recovery in the domestic economy, choosing the right time for withdrawal of the fiscal and monetary stimulus remains a major challenge for the policymakers, the Organisation for Economic Co-operation and Development (OECD) said today.

Projecting a 7.3 per cent growth in 2010 and 7.6 per cent in 2011, inflation is expected to remain high, the OECD, a body of the developed nations, said in its India Economic Outlook report.

"Given the resurgence of inflationary pressures so early in the recovery, a key challenge facing the policymakers is ensuring a timely withdrawal of fiscal and monetary policy stimulus," it said.

The report projects the wholesale price inflation at 3.5 per cent in 2009, and sharply higher at 7 per cent next year and a tad lower at 6.2 per cent the year after.

However, retail inflation, which pinches consumers the most is pegged at 7.8 per cent in 2009, a bit lower at 7.1 per cent next year and still down at 6.2 per cent in 2011. It indicates that the economic momentum is strengthening and the deficient monsoon this year would have only a moderate impact on the recovery, said the report.

"In the near-term, the ongoing recovery will be only modestly hampered by the poor monsoons," it said.

Tackling high fiscal deficit that followed the stimulus packages would be a onerous task, said the report, adding, "reining in the large fiscal deficit, which has widened further in 2009, will be particularly difficult given both its magnitude and the permanent nature of recent increases in spending."

In its fiscal stimulus packages, the government has cut excise duty by 6 per cent and service tax by 2 per cent, besides increasing plan expenditure to perk up the economy.

The Reserve Bank has also cut policy rates and other tools to reduce interest rates and increase money supply.

Expecting monetary tightening, the OECD projects long-term interest rates to rise to 7.8 per cent next year and further to 8.1 per cent in 2011, from 7.1 per cent in 2009.

Inflation for October stood at 1.34 per cent from a month earlier on costlier minerals and fuels, while food inflation is nearing a high 15 per cent.

The RBI has projected inflation at 6.5 percent by 2009-10 end.