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Resource centre on India's rural distress
 
 

Binary equation -Renu Kohli

-The Telegraph

Can stability be achieved by sacrificing growth?

Has the macroeconomic configuration turned binary? With inflation occupying centre stage, the choice seems fast splitting between stability and growth. Can the former be secured without compromising the latter? That’s the worry with policies swinging to address price, exchange rate and external stability. This is not to say that growth has receded to secondary position. But as interest rates harden and fiscal policy diverts to counter inflation, safeguarding stability without cost to output is fiendishly difficult. In any case, a tipping point appeared to have been reached with inflation hurting growth. There isn’t much to choose between a rock and a hard place. This is where the Indian macro constellation is now.

In the past one month, a series of monetary and fiscal actions, including interest rate increases and reductions in fuel levies, tariffs and duties, has raised the spectre of a retarding economic recovery. Inflation, which has been above target for more than one year and climbing since last September, surged close to 8% in April. Food prices rose faster, energy and transport prices paced in double-digits, while price growth of most other goods and services ranged between 7-9%. The alarming spread can become a self-reinforcing spiral as food and fuel prices shape households’ inflation expectations, which drive consumption and pricing decisions. This elicited a surprise, inter-meeting rate hike and liquidity withdrawal on May 4 by the Reserve Bank of India. Another rate increase followed last week.

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