Will inflation derail growth?

Will inflation derail growth?
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First Published: Fri, Feb 26 2010. 10 24 PM IST

Revival signs: The government is betting on growth. Indranil Bhoumik / Mint
Revival signs: The government is betting on growth. Indranil Bhoumik / Mint
Updated: Fri, Feb 26 2010. 10 24 PM IST
New Delhi: The government’s move to encourage consumption will promote demand-led economic growth in 2010-11 but it may also put more strain on the already high level of inflation, analysts said.
“The aim of the policy was to enhance public expenditure so as to boost demand and spur the process of development and economic revival,” the government said in its Budget for 2010-11.
The government expects demand-led growth to restore tax buoyancy in the medium term.
As a surprise bonanza for individual tax payers, finance minister Pranab Mukherjee broadened the tax slabs with an eye on boosting consumption demand.
He also provided Rs1,73,552 crore for infrastructure development in the next financial year, which accounts for more than 46% of the total Plan allocations.
Revival signs: The government is betting on growth. Indranil Bhoumik / Mint
These moves, the government said, would insulate vulnerable sections of society and sectors of the economy from the global economic slowdown, as well as ensure the revival of the economy with a higher growth rate.
“In 2009-10, while (the) government boosted demand by substituting private consumption with increased public spending, in 2010-11, the government is pushing for more private spending,” said D.K. Joshi, principal economist at ratings agency Crisil Ltd.
For 2010-11, the finance ministry has assumed the economy will start returning to the trend growth rate of 8.5%. Inflation for the year has been estimated at 4%.
Mint’s editors analyzes the Budget live! Visit Livemint.com’s Budget 2010 microsite on budget day for breaking news and analysis.
For 2011-12 and 2012-13, the government has assumed growth of 8.5% and 9% respectively.
Crisil has forecast GDP to grow at 8% and inflation to be between 6.5-7% in 2010-11.
Joshi said the Budget may lead to higher inflation because of its push for demand-led growth. The Reserve Bank of India “has to be vigilant and may need to opt for monetary tightening”, he said.
The government said although the Indian economy, along with a few others, has showed signs of revival recently, it was still too early to predict complete recovery and thus the need to proceed cautiously.
However, impressive growth data in the manufacturing sector has also provided the government an opportunity to revert to the path of fiscal consolidation in a gradual manner staring from 2010-11.
The Indian economy grew at a poor 6% in the three months ended 31 December, according to Central Statistical Organisation data released on Friday. This was mainly due to contraction in farm output as well as government spending.
While the farm sector shrank by 2.8% due to lower kharif output in the wake of last year’s drought, government spending contracted as a result of a huge base effect during the same three-month period in the previous year.
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First Published: Fri, Feb 26 2010. 10 24 PM IST