Govt feels inflation heat

ECONOMIC SURVEY 2006-07

Market falls 170 points; Price rise cost congress elections, says Soni.

Inflation put the government under acute pressure a day ahead of Budget 2007-08, with the Economic Survey indicating that the sustainability of growth depends on taming inflation.

The markets fell 170 points or 1.25 per cent in reaction, with the Bombay Stock Exchange (BSE) benchmark Sensex closing at 13,478. Investors offloaded shares amidst fears of a further monetary policy tightening.

Earlier in the day, Congress spokesperson and Tourism Minister Ambika Soni said price rises were responsible for the party losing state elections in Punjab and Uttarakhand.

The issue led to the prime minister and finance minister making statements during the day, indicating that inflation would be the focus of economic policy-making in the near-term.

Finance Minister P Chidambaram said the survey had rightly pointed to the need to tackle prices to make growth sustainable.

Prime Minister Manmohan Singh said the task was not easy. "We are trying to control inflation while stimulating growth impulses in our economy," he told reporters.

Maintaining an overall upbeat stance, the Economic Survey, the government's annual report on the state of the economy, said, "Vigorous growth with strong macro-economic fundamentals has characterised developments in the Indian economy in 2006-07 so far. However, there are some genuine concerns on the inflation front."

Inflation, as measured by wholesale prices, has been rising steadily since August and is running at 6.6 per cent, after a peak of 6.73 per cent at the start of the month.

Consumer prices are rising even faster and the survey warned that inflationary pressure would not be fully tamed unless supply-side constraints, especially in food, were removed.

The survey said a shortfall in domestic production of primary articles, led by food items and minerals, and a hardening in their international prices has caused prices to rise.

Interestingly, it has admitted that with rising international prices, the impact of imported wheat and pulses in cooling domestic prices was limited.

The survey's robust views on sustainable growth stem from improvements in the savings and investment rates and "tangible progress towards fiscal consolidation and a strong balance of payments position."

The survey attributed its optimism on growth to four factors: One, the "demographic dividend" of a growing workforce that would increase the savings rate; two, increasing productivity gains in manufacturing; three, the availability of labour at reasonable wage rates; four, the potential for services sector growth, which accounts for 56 per cent of GDP.

The economy is expected to grow 9.2 per cent in 2006-07 "" its fastest pace in 18 years.

Accommodating the coalition government's Common Minimum Programme, the survey highlighted the need for "inclusive growth" but said "such success will primarily depend on the success of achieving and maintaining high growth."