Fiscal 2007-08 ends today. How was it? If you look only at the Sensex?it started at 12,692, April 2007, touched a peak of 21,106 in intraday trading in mid-January, and by mid-March was languishing at 14,809?a yo-yo comes to mind. Similar movements can be plotted for that other number: inflation. Beginning fiscal 2007-08, inflation as measured by the WPI breached 6%? it went up and then came down to 3.1% by mid-October, but is now back up, at 6.7%. Growth projections, though, seem to be in secular decline. Sub-8% GDP growth rates are now staple discussion, a big change from the earlier 9%-plus growth talk. That?s really the story of this fiscal. Growth was tamped down to fight inflation, but inflation is up again, while growth impulses may be getting weaker. As these columns have argued many times, this is essentially a policy mistake, courtesy RBI. Inflation at the beginning, as at the end of the fiscal, was supply constraint-driven. Now RBI, whose credit policy announcement will set the tone for the new fiscal, will need to be bold enough to recognise the nature of current inflation. But will it cut interest rates? Consumption demand has contracted and investment sentiment is affected. True, advance tax figures show corporate optimism. But there are real structural worries.
A good lesson to learn from 2007-08 is that Indian policymakers still need clarity on the state of the economy in terms of potential and how to grade risks. A few years of sparkling growth, combined with moderate inflation (even above 4%), should be acceptable. Indeed, given that India would need to invest a mountain of capital to build the infrastructure it deserves, even some high inflationary episodes may occur?supply bottlenecks can develop. Plus, and as our columnist today argues, commodity price inflation will be a global phenomena in the near future; generic responses, not kneejerk ones, are required. Subsidising lower income groups in case of high food inflation is a better policy response than using the hammer of interest rate hikes or bans on forward trading. The problem is low inflation tolerance. There?s a respectable political economic hypothesis that most parties would prefer moderate growth with low inflation to high growth with moderately high inflation. Pray that doesn?t become the mantra for 2008-09.
