The current inflationary spate which has resulted in double digit rates of inflation, opined Mr Kar, was growth driven. He observed that India’s average annual GDP growth rate of 9.3% over the past 13 quarters had far exceeded expectations. However, persistent supply constraints, primarily in the form of infrastructural bottlenecks, had led to overheating in some sectors which manifested itself in the form of an upward surge in prices. Also, an unprecedented inflow of foreign capital over the past few years further augmented demand and, thereby, exacerbated the situation.
Mr. Kar maintained that the current inflationary trend was a global phenomenon actuated chiefly by rising prices of crude oil, delays in industrial capacity addition and a global increase in food grain prices. Still, mounting inflation held dire consequences for the Indian domestic economy. The RBI had been impelled to adopt a tighter monetary policy. Rising rates of interest and input costs in conjunction with softening global demand did not augur well for investment driven growth. The impact of these measures, Mr. Kar pointed out, would be further amplified by the fact that that capital inflows no longer remained as robust as they had been over the past few years. In essence, a tighter monetary policy to check inflation would have a dampening effect on India’s GDP growth rate.
Mr. Kar offered a word of caution to the audience by warning them that the prevalent high rates of inflation might not abate any time soon and might actually touch the 15% mark. This would necessitate still greater monetary tightening through further hikes in the repo rate and the CRR. As the supply constraints cannot be addressed overnight, the government would have to rely on dampening the demand to curb inflation. Continued moderation in an already sluggish industrial growth would be a natural concomitant thereof. The ballooning prices would also adversely impact the fiscal indicators as the government would be forced to run a higher fiscal deficit in order to meet the rising costs of imports and domestic subsidies.
Mr. Kar concluded on an optimistic note by stating that despite short term pressures, the fundamentals of the Indian growth story remained in tact and this transient lull would not erode the firm pillars of India’s future prosperity. Subsequently, he invited queries from the students who were all too keen to raise probing questions as well as air their point of view about the current economic situation.
