While the domestic inflationary trajectory is showing no sign of pausing or reversing any time soon, there are increased risks to domestic growth on account of both adverse domestic and global factors, at the current juncture. Moreover, a circular loop between fiscal issues and growth is quite likely.
There are undoubtedly, negative risks to the fiscal deficit target of 4.6 per cent for 2011-12, due to slippages on account of higher fuel/food/fertiliser subsidies, lower than estimated tax revenue collection on account of moderating growth, and likely higher expenditure in the last year of the 11th Five Year Plan. Given the likely slippage in the fiscal deficit, and correspondingly higher government borrowings, there is a potential danger of crowding out of private sector credit demand.
According to the new IIP series, the moderation in industrial activity is more gradual, with growth coming down from 8.3 per cent in the first half of 2010-11 to 8.1 per cent inthe second half. Similarly, capital goods production averaged 15 per cent in 2010-11 under the new series as against 9.5 per cent under the old series. Hence, while thus far there is not much moderation in credit growth and industrial activity, a sustained continuation of monetary transmission into higher lending rates could impact both consumption and investment demand.
Containing inflation is crucial and monetary policy is doing the heavy lifting for now. However, the fiscal responsibility cannot be absent for long – else we may possibly stare at a scenario of stubbornly elevated inflation, coupled with muted growth.
The writer is chief executive (financial services), Aditya Birla Group
