Growth v/s Inflation
The Indian economy started on its journey of 2008 riding on sentiments of high growth of more than 9% and a low inflation of less than 4% till it was woken up/(thrown of its path) by the of the storm in the global economy in the form of escalating crude oil prices due to speculations in futures market and a deepening realization of the impact of the sub-prime crisis. Since then inflation level has breached all levels in the last decade. Inflation touched 12.1% for the week ended 12th September 2008. The RBI has revised its growth estimates for the year from an optimistic 9% to 8% now.
Agriculture and allied activities was the lone savior for the economy during the last year growing at nearly 4.5%. The manufacturing sector was greatly hit. This is clearly reflected in Index of Industrial Production (IIP) figures for April-May 2008 which grew by only 5.3% as compared 10.9% for the same period during the previous year. Though mining sector has grown at a higher rate, the growth in the manufacturing sector and electricity production has been hit greatly. Machinery and equipments, Food products, cotton textiles and rubber, textiles and petroleum products industries which together form a major chunk of our industry have either seen deceleration in growth rates and even negative growth rates.
The recession in the global economy has been triggered on account of escalation in oil prices which doubled from $70/bbl to $140/bbl in just one year and this has had a spiraling impact on all other sectors especially manufacturing sector. In order to counter the inflation the RBI has resorted to contractionary monetary policy. Its main aim is to reduce inflationary pressures by reducing demand. For this purpose RBI has increased the CRR rates by 1.5% in the 9 months since Jan 2008 from 7.5% to 9%. Also it has increased the Repo rates i.e. rate at which the RBI lends to banks thus increasing the short term borrowing rates for banks against which the...