The economy may have "decidedly taken off for higher growth" but could face turbulence from inflation.

Last year, the Economic Survey for 2005-06 began with a self-consciously ringing tone reflecting the policymakers' enthusiasm over the economy's "robust demonstration of its nascent strengths;" a hat-trick of over seven per cent growth, a feat that had, in the authors' view, been achieved only in five years of "recorded history" merited that applause.

The latest Economic Survey, for 2006-07, acknowledges in an understated way that India has "decidedly taken off for higher growth" but adopts a sober tone on account of the one factor that could cause turbulence — inflation. Indeed, what is remarkable about this Economic Survey is the policymakers' admission that even as 2006-07 will close with a 9 per cent growth, bettering in effect all previous highs, in the new fiscal it may not be the cakewalk it had been the past four years. To the extent that the Survey weaves the problem areas into the success story, it sets the tenor for the Budget and outlines for the policymaker some action points that will need to be addressed on a priority basis if the growth momentum is not to slacken.

The Survey finds the roots of inflation in both the rising demand consequent to high growth justifying then the Reserve Bank of India's money-tightening measures and, supply-side constraints. Cautiously, it points to the ongoing fiscal measures for meeting the shortages; but, in retrospect, those policies have had little effect even as the RBI's interest rate hikes will raise the cost of capital for those that have no alternative and, in turn, add to the price rise. The Survey simply reiterates the general policy stance. Welcome as its stress on the price rise and building the social sector is, the reader is likely to feel the challenges of inflation daunting given the existing responses. But the economy has some good things going for itself, the most important of which are a healthy foreign exchange reserve of $180 billion, a sharp rise in investment domestic and foreign — Foreign Direct Investment almost doubling in the first half of 2006-07 — a robust consumer demand, and a keen awareness among States to remain fiscally prudent.

Given these reference points, the weak areas that the Survey notes — an indifferent core sector growth, the poor social and physical infrastructure, a sluggish agriculture growing at a mere 2.7 per cent that does not add to jobs or the stock of foodgrains and other staples — not only have contributed in one way or other to the price spiral over the last eight months but also defined the economy's limits to sustaining growth. The Survey recognises the nature of the problems besetting the economy. For solutions the nation has to await the Budget.

© Copyright 2000 - 2009 The Hindu Business Line