The review has shown that the industrial sector, which underwent a severe downturn in 2008-09, is beginning to recover from early 2009-10, but it is not yet clear that the pick-up is underpinned by a strong revival in real demand. The monsoon failure has created uncertainty as to whether demand growth will be sustained. The fiscal stimulus has helped in substituting for lost private demand to some extent and prevented a steeper fall in GDP growth. However, we do not expect a further boost over and above what happened already so far from fiscal expansion. While the growth in the non-agricultural sector in the current year would be somewhat higher than last year, a marked decline in agricultural output is expected to bring down this years growth in GDP below last years level. In this context, high inflation, which has emanated from the agricultural shock and may be spreading to non-food products, will pose a big policy challenge. At a time when last years aggressive monetary loosening measures seem to have just started boosting growth, the central bank may have to start tightening sooner than later.
*Mathew Joseph, Karan Singh, Pankaj Vashisht, Dony Alex, Alamuru Soumya, Ritika Tewari and Ritwik Banerjee, The State of the Indian Economy 2009-10, Working Paper No 241, Icrier, October 2009