The first quarter of 2008-09 has ended dismally for the economy as a whole, from raging inflation, which had risen from 8 per cent in March to around 12 per cent by end-June, while industry and infrastructure have continued their growth downtrend into the new fiscal year. Business expectations are therefore low at present and growth impulses are muted. The corporate sector results in the first quarter, barring perhaps the IT sector, would likely underline the contraction of the economy under way. Inflation, not only in India but globally, is the major challenge for policy-makers to ensure macro-economic stability, and IMF has warned that oil and food prices are likely to remain high and volatile for quite some time to come.

If the food and fuel prices are allowed to get translated into general increase in inflation, it would delay supply-demand response to higher prices and hurt the poor who have the least capacity to hedge against inflation which the IMF says its emphasis on monetary actions in countries where interest rates are still low. RBI is pursuing a calibrated approach in tightening monetary policy in order to contain liquidity and beat down inflation expectations in a climate of soaring oil prices and record levels of food and metal prices. Over the last six weeks, RBI had already revised up the repo and CRR rates to 8.5 and 8.75 per cent respectively by mid-July. From all indications, GDP growth is slowing down on the lines projected by IMF and other agencies in the 7-8 per cent range. It can be therefore expected that RBI will make further upward adjustments in policy rates when it comes up with its first quarter review on July 29.

The tight oil market, a weakening dollar and speculation have kept oil prices high and pushing upwards. Oil prices which zoomed from 100 to 147 dollars a barrel within the first seven months of 2008 are unlikely to decline in the near future. Recent Food and G8 Summits have not come up with any plan to tackle the surge in oil and food prices beyond some pledges of bilateral and multilateral assistance for countries in serious difficulties. In the absence of coordinated global responses and determined national-level actions on the supply side, difficult times are still ahead for all countries.

Industrial growth was a mere 5 per cent in April-May as against the 10.9 per cent in the last year. Time deposits are slowing down which only reflects the current negative interest rates in relation to the near 12 per cent inflation. Since inflation expectations continue to remain high, and Finance Ministry officials themselves rule out any early soften-ing of price pressures, economic growth in the first half of the current fiscal is bound to be modest. For the global economy, the outlook is grimmer as consumer price inflation now remains above the benchmarks of most central banks of advanced countries. For many developing countries, with exceptions like China and, to some extent, India, the dilemma is whether to control inflation or stimulating the economy but since leading developing countries already have double digit inflation (Indonesia, Vietnam and Russia), there is no escape from policy tightening.