A reforms stimulus

The crying need to bring inflation to heel should hopefully force finance minister Pranab Mukherjee to present a tight budget on 28 February. The Reserve Bank of India (RBI) has already been busy tightening its monetary policy by increasing interest rates seven times since March. This overdue withdrawal of monetary and fiscal stimulus could hurt growth in the short run. It needs to be balanced with a fresh reforms stimulus.    Here’s why. Almost exactly a year ago, the finance ministry ended the first chapter of its excellent Economic Survey on an optimistic note: “It is entirely possible for India to move into the rarefied domain of double-digit growth and even attempt to don the mantle of the fastest-growing economy in the world within the next four years.”  The optimism came at a time when India was being lauded for its quick rebound from the brutal global downturn. A lot has changed since then. Now the threat of double-digit inflation is a far more potent issue than the prospects of double-digit growth. Policy attention has dramatically swung from the latter to the former.  Demand management is thus the big topic of the day. The best way to control inflation in the short run is to compress private demand through higher interest rates and compress government demand through a lower fiscal deficit.