...And In India Too
Is there a risk that the Indian growth story could be derailed? Warnings about inflation from the Reserve Bank of India (RBI) and a sudden large adjustment in the WPI done in early April highlight the potential risks to our economy. From 9 per cent in 2007-08, projections for 2008-09 are down to 8 per cent.

Agricultural production — and given food price inflation — is a cause for concern. Tightening liquidity conditions, perceived high interest rates, a domestic credit shock and capital outflows together could be the perfect storm that drives growth rates below 6 per cent.

We are reasonably self-sufficient in major commodities, and the food supply is more or less in balance. But food prices and commodity are likely to remain high, driven by growing incomes; but how much of that inflation is permanent and how much temporary is to be seen.

Monetary policy cannot address inflationary pressures that are supply-side driven. The more classic response would be to let the exchange rate appreciate, but that too is a political no-no in the current circumstances.

So while India may be relatively insulated from the contagion of the credit market, this is no time for complacency either. As IMF’s Johnson says, now is the time when prudent governments should draw up contingent plans to guard against deeper ‘tail risks’ — the risk that an unlikely event that can create catastrophic results. Buried in the IMF’s cautious optimism lies the scintilla of doubt.

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(Businessworld issue 29 April-5 May 2008)