iSikkim will review the state of Indian economy in the current global context in a 10 part series.

There is a persistent sluggishness in advanced economies even as positive signals have started trickling in from emerging market economies (EMEs). The recovery in advanced economies has become slower in the second half of 2010 compared to first half of the same year. But EMEs continue to show strong growth. The slow recovery accompanied by large unemployment in advanced economies has raised concerns about the sustainability of the global recovery. The International Monetary Fund (IMF) also projects a lower world GDP growth of 4.2 per cent in 2011 as compared with 4.8 per cent in 2010.

The slowing momentum of recovery has prompted the central banks of some advanced economies to take steps that would further stimulate private demand. While such a monetary policy may help the global economy in the medium-term, in the short-term it will trigger further capital inflows into EMEs and put upward pressure on global commodity prices.

In the case of India economic activity has started picking up. Most industrial and service sector indicators also point towards sustained growth. The 8.8 per cent GDP growth for Q1 of 2010-11 suggests that the economy is on the high growth trajectory. This is being driven mainly by domestic factors. One major concern over last couple of years has been the agriculture. But this year South-West monsoon has been normal which should boost agricultural output and rural demand.

Still, inflation remains significantly above making life of common man difficult. While non-food manufactured products inflation has stabilised, food inflation remains high. Inflationary pressure on food prices despite a normal monsoon pose uncomfortable question not only for the Central Bank and the government but also for the common man. The risks of structural food inflation spilling over into prices of other commodities are significant.

(Based upon quarterly review of RBI’s monetary policy)

Next in this series: The State of the Economy

 

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