New government should strike balance between growth and inflation

First the good news. India’s wholesale inflation rate has moderated, albeit marginally, to 5.20%, in April from 5.70% in the previous month, driven down by a sharp drop in vegetable prices.

Now for the bad news – by all indications, the price situation could worsen, given a higher likelihood of deficient rains this summer. Global and domestic meteorological agencies have forecast a sharp increase in the likelihood of an El Nino weather pattern this year, which can shake up global weather and trigger a poor monsoon in India, potentially posing an immediate challenge for a new government set to take office in the next few days. El Nino – ‘little boy’ in Spanish – is a climate glitch marked by higher seasurface temperatures in the equatorial Pacific.

Its effects can ripple globally, from storms in California to leaving Australia and India at greater risks of a drought. The retail inflation data, which was released on Monday, has already shown that food prices have begun to rise again.

The retail inflation rate jumped to 8.6% in April from 8.3% in the previous month as the food inflation rate rose to 9.8%. While vegetable and fruit prices contributed 50% to the rise, non-food, non-fuel inflation, or what economists call core inflation, remained unchanged in April. For the incoming government, this isn’t quite a happy situation to be assuming office. Its immediate task would be to revive growth, which has slipped into sub-5% levels.

This is the first time in a quarter of a century that India’s economy would grow at below 5% in two successive years. At the same time, however, it cannot drop guard on taming inflation. The Reserve Bank of India has firmly maintained its commitment to its priorities on price control, even though it may come at the cost of lower growth.

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Fiscal and macroeconomic managers will have their task cut out on balancing the growth-versus-inflation control objectives. Growth is critical to create additional jobs and raise people’s income levels; but persistent inflation can erode the gains from growth.

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