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Govt faces challenge of sustaining low inflation and boosting growth

Even as WPI-based inflation fell to a 41-month low of 4.89%, it may again rear its head once economic expansion gathers momentum

Somesh Jha  |  New Delhi 

Even as the wholesale price index (WPI)-based inflation fell to a 41-month low of 4.89%, there are chances that inflation may again rear its head once economic expansion gathers momentum. To avert that situation, economists have warned the government to go for investment-led growth rather than consumption-driven expansion.

“Government should look to bring in policies which can push the investment sentiments among industrialists. We need an investment-driven growth rather than a consumption-led growth as this would help in increasing economic expansion as well as keep a check on inflation,” Devendra Pant, Director India Ratings said.

India's economic growth is estimated to have declined to a decade low of five% in 2012-13 and the government expects it to recover to 6.1-6.7% in the current financial year. On inflation front, RBI wants to stabilise it at 5% by March-end.

Economists said as RBI is expected to lower policy rate further, the transmission of cuts to lower interest rate may also boost demand and that may lead to higher inflation. But, that should be tackled with more supply of goods and services, that would keep check on inflation.

They said in a way a balance has to be stuck to keep inflation at low level and speed up growth as demand is also needed to boost investment.

Pant said inflation has led to added expenditure pressure on necessities and hence, the expenditure on other goods has decreased which is leading to industrial slowdown. Industrial growth fell to a decade low of one% in 2012-13, even as it recovered a bit in the last month of the year.

In a different context, global rating agency Standard & Poor's also warned India on anemic investment growth, which may prompt the agency to downgrade the economy's rating to junk in a year.

Finance Minister in his speech at Harvard University last month had said,"China probably has to consume more, while India has to invest more."

Since September, 2012 the government has been trying to remove the perception of policy paralysis and create an environment conducive for investment. It liberalised retail trade, aviation and set up the Cabinet Committee on Investments (CCI) to boost investment. However, S&P said that it is yet to be seen as to how investment will get perk up from decisions of the Cabinet Committee.

Soumya Kanti Ghosh, newly appointed chief economic adviser with the State Bank of India, projected low inflation-low growth scenario for at least 2013-14. “Inflation would remain lower than 5% and the growth would also not exceed beyond 5.5% for the current year,” he said.

It is precisely this scenario that the government has to break, to give a boost to growth while keeping a check on inflation.

Economists said this issue could be tackled more from tackling supply side, and easing monetary stance by the RBI.

The decline in core inflation (inflation in manufactured items sans food products) to 39-month low of 2.6%, Ghosh added, has given a good scope for RBI to cut the rates which could be witnessed in and around June or July.

“The rates could at least be slashed by 25 basis points and I would not be surprised even if it goes beyond that”, he said.

Anis Chakravarty of Deloitte said the small and medium enterprises have suffered a lot because of high borrowing rates. "If that is bought down by RBI, then it will surely give a boost to industries”.

Chakravarty expected a 25 basis point cut in the repo rate by RBI but he said it would come only after one more cycle. “RBI has been conservative with rate cuts in last two years and it would probably wait for one more cycle. The consistency of inflation subsiding is also to be understood for RBI to cut rates.”

What may come in way of RBI cutting rates would be ballooning trade deficit. The deficit widened to a whopping $17.8 billion in April due to high rise in gold imports. RBI might wait to see a declining trend in trade deficit before it goes for rate cut, feel some economists.

First Published: Sat, May 18 2013. 18:36 IST