Inflation and its impact on Industrial growth

Recently, in the annual Spring Meeting of the World Bank and the International Monetary Fund (IMF), both the institutions sought to focus on the emerging economic crisis in developed and developing countries including inflation. Inflation has been a challenge all over the world including India especially keeping in view of its negative impact on growth, and it has been extensively discussed how to overcome the inflation across the world, and how to contain its negative trend for taking the world economy on its track. In India too, inflation has been a hard stone before the government for the last few months and still the response of all remedial steps taken by it, is reflecting the marginal effect. Even though the Reserve Bank of India (RBI) is not beyond the concerns of surge of inflation, inadequate inflationary measures taken by it would derail the goal of the government to check the inflation and protect the industrial growth of the country; otherwise, it is going to hurt the momentum of economic stability. The risk to growth is stalking, and impact would be more crystal in reflection if the measures remain noncoping with the challenges to be handled. There is no iota of doubt that he rise in price of global commodities, particularly oil, is playing the most pivotal role to these challenging development. Commenting on the surge yet again on the inflation, Finance Minister Mukherjee said : I am afraid there has been some upward movement of food items of course, the weekly fluctuations take place and one of the reasons may be the high prices of onions, which [we already] have taken steps. The spiraling prices of food commodities are contributing to the common mans woes and severely impacting their monthly food budget. As yet the global price of oil is to be fully adjusted domestically; it clearly indicates the surge in inflation. Apart from all the necessary measures taken by the machinery, the food crisis is also persisting and even goods like onion are imported from the neighbour country. A good step was also taken is to make the flow of products within country more smooth and ensured no hoarding of food products in the domestic market. Even then, India has been vulnerable because food price inflation has been high, and it has also adversely impacted largely the poor section of the society. There is no doubt that apart from devastated tsunami in Japan, Arab uprising, the heat waves in Europe and drought in Russia and flood in Pakistan and flood and drought across the world have created unprecedented supply side constraints. It may take time to get some natural relief, but there is a desperate need for economic management strategies to be implemented to get rid of this financial menace. In the third quarter review of RBI on January 25, RBI Governor D.Subbarao stated: Current growth and inflation trends clearly warrant that we persist with the anti-inflationary monetary stance. Looking beyond 2010-11, the Reserve Bank had, however, expected that the domestic growth momentum to stabilize and inflation is expected to moderate from the first quarter of 2011-12, while admitting that several upside risks are already visible. In the previous quarter, RBI was well aware that there is strong possibility in increase of prices of food products, resulting in spurt in inflation. Even then, it was very much hope of industrial growth closed to pre-crisis trajectory. Its logic has a sound credibility. The 8.9% per cent gross domestic product (GDP) in

the first-half of 2010-11 speaks a sound language indicating that the economy is on path of growth, resulted mainly by the domestic factors in spite of tough wave of global economic crisis. In the third quarter review, the RBI had projected year-on-year wholesale-price index (WPI) inflation for March 2011 at 7 percent. But, coming under intense pressure of international crude prices, it had revised its forecasting at 8 percent in its mid-quarter review on March 17. But, the projected inflation rate touched to 8.98 per cent above projected rate of 8 per cent. Despite significant steps on policy and liquidity by the RBI, the inflation could not be checked at the level it required. It puts a question before the economic bodies whether this inflation rate would remain as normal rate, and then what would be its impact on the industrial growth? Or will it actually undermine the economic sustainability? It is a challenge before the policy-makers and policy-executives to contain the inflation from the supply side in place of adopting the demand side. This will help to check the inflation with minimum hindrance to growth, and the government will have to bring down the fiscal deficit, particularly from revenue account to ensure the smooth industrial growth taking India towards its destination. Dr. Mohammad Naquib Associate Professor College of Business Umm Al Qura University Makkah- KSA