Although inflation is likely to remain high till December, it is expected to fall during the fourth quarter of the current fiscal, Dr C Rangarajan, Chairman of the Prime Minister's Economic Advisory Council said. Speaking at the Fedbank Hormis Memorial Lecture, he said that inflation which remains a major cause of concern was expected to ease significantly by March 2012 to as low as seven per cent.
The extraordinary high level of inflation seen in the last two years was primarily due to severe supply constraints, especially for agricultural products. Monetary and fiscal policies are tools that can be used to contain overall demand pressures.
While there has been considerable debate on what is an acceptable level of inflation, Dr Rangarajan defined ‘threshold level of inflation' as being the level beyond which costs of inflation begin to rise sharply over the economy. The two sectors which pose considerable challenges in the medium term are the farm economy and power sector.
Speaking on the topic ‘Indian Economy – Prospects and Constraints' he said that growth in agricultural income due to good monsoons and the expected growth of three per cent in agriculture on the back of a strong 6.6 per cent last year pose a challenge. The fluctuating GDP growth target of 7.5-8 per cent will depend on the performance of the agricultural sector to a considerable degree, especially on the back of slackness in industrial growth.
INCLUSIVE GROWTH
While economic growth rate is important, it is also important to know who benefits from this growth. There is an imperative need that the growth process includes every section of the economy. A high rate of growth alone will enable the government to raise the resources to meet the various socio-economic obligations, Dr Rangarajan said.
If India grows at nine per cent an annum, the per capita GDP will increase from the current level of $1600 to $8000-10,000 by 2025. The ultimate objective of the ongoing financial reforms is to improve the disbursement efficiency of the available resources. The coming decades will prove significant for India as it will transit from a low income country to a middle income country. Here, the banking system will have to develop and meet the needs of a growing and diversifying economy.