“With policy paralysis not likely to ease any time soon, India may have to settle for sub-par growth and elevated inflation over the next couple of years,” Leif Eskesen, Chief Economist for India & ASEAN at HSBC, said in a research note. He, however, does not think India's economy is experiencing stagflation at the moment.
But slowing GDP growth coupled with rising prices, gives little room for fiscal or monetary maneuvering. Add to this a ballooning budget deficit, which limits the government’s ability to implement new measures to kick-start the economy.
The government is under pressure to put its fiscal house in order and cut, for example subsidies on fuel. Besides political pressure not to do so, such a move also fans inflation.
In 2011, India spent $15 billion on fuel subsidies and this figure is forecast to rise to $18 billion this year, according to Baig. Without subsidies, he estimates diesel and kerosene prices could rise by 30-35 percent, and add 3-4 percent to inflation.
“The fact is that when going gets tough, you have to pay the price for economic mismanagement, but it is getting harder to do that. Pressure is rising to cut subsidies and to kick start structural reforms, but it’s going to be difficult to do because of political pressure and public opposition,” Ramya Suryanarayanan, Economist, Group Research, DBS Bank, said.Page 2 of 3 | Prev Page | Next Page