As the economy enters the second half of fiscal 2010 - the traditional busy season from October - the incipient signs of industrial revival and the earlier than anticipated return of capital inflows - portfolio and direct - are overshadowed by bleak prospects in agriculture and galloping food prices, posing a challenge to policy-makers who were exulting in having managed to ride out the global storm. The downturn in exports has already lasted 11 months and a corresponding import decline, reflecting the country's economic slowdown, may at best help in keeping down the current account deficit at its lowest.

Indeed, macro-economic management will be more difficult in the latter half of the year as the current policy stance is not to withdraw monetary accommodation and fiscal expansion, lest even a six per cent growth is in jeopardy, at a time the drought has spoiled the growth outlook. Government holds on to the stimulus, no matter the huge fiscal deficit, and counsels RBI to refrain from reversing the gear at present. The central bank is faced with a dilemma at a time when the WPI is quitting negative territory - a statistical myth -and is set for a surge in the coming weeks and months which, according to analysts, could touch 8 per cent as against the RBI policy assumption at 5 per cent at end March 2010.

Macro-economic policy guided by WPI will no longer hold the scales even. CPI, the real indicator of consumer prices for food and other basic needs, had long hovered around and above double digit. Food price inflation had also been consistently rising within the WPI index, which was not taken seriously by Government. It was this worry that induced RBI to think aloud about a possible unwinding sooner than had been expected, especially in the absence of tangible supply side management to ensure that market prices of rice, sugar (despite some imports), pulses, edible oils, etc are held at reasonable levels for the public in general. The Agriculture Minister Mr. Sharad Pawar has now come up with the warning of rise in retail prices of rice, as there would be an estimated shortfall in paddy sowing area of over six million hectares.

There would be tensions between fiscal and monetary policies as Government consumption expenditure is maintained, till private investment picks up while interest rates remain at present levels, as inflation keeps rising. In the current fiscal year,WPI inflation build-up was 6.12 per cent till the week ended September 12 though on a yer-on-year it was only 0.37 per cent. The rise in 'food articles' was as high as 14.8 per cent. RBI is likely to spell out a calibrated approach when it announces the mid-term policy on October 27 in pursuing its mandated objective of promoting growth with price stability. Meanwhile, though India's financial system is sound and stable, RBI has cautioned banks to take a careful look at real sector companies which could have risks of exposures in related entities.

The Eleventh Five-Year Plan is in disarray. From 9 per cent in the first year (2007-08), growth was down to 6.7 per cent in the second and is likely to be in the 6 to 6.5 per cent range in the third year. Growth outlook for the following two years is not currently expected to rise above 7 to 8 per cent. The Planning Commission has already scaled down the plan target from 9.5 to 7.8 per cent. The prospects for the fourth and fifth year ending March 2012 would depend not only on the domestic economy moving into an upswing with private demand and investment but also the post-recession recovery in the industrial nations which, according to IMF, would be weak and uncertain. The world economy is still wallowing in slump while the financial and banking sectors are yet to be fully stabilised in the advanced economies where domestic demand has not begun to gain traction.

The Prime Minister Dr. Manmohan Singh, who attended the third G-20 Summit in Pittsburgh (USA) on September 24-25, had hoped that advanced economies would do everything possible to restore world growth and trade and stabilise the banking and financial sectors which impact on India's capital flows, exports and investment. Secondly, India has been calling for greater commitment by all nations against resort to protectionism in all forms, whether in trade, services, investment or financial flows. His expectations of world growth and finance returning to pre-crisis levels do not seem achievable at any rate over the medium term. World trade was expected to shrink in volume by 12 per cent in 2009 and possibly recover by 3 per cent in 2010. The changing global scene would have to be taken into account by the Planning Commission as it works on its mid-term appraisal of the eleventh plan.

A flurry of policy utterances by President Obama at the United Nations, in the General Assembly as well as at the Climate Summit, as also US moves in G-20 for a new world economic order in which his country does not continue to be the consumer of the last resort and all nations must share responsibility for global challenges and rebalance economic growth without undue dependence on US demand have posed new challenges for the emerging economies as well as other developing countries besides advanced countries themselves. President Obama has stretched his concept of 'shared responsibility for our common future' to an extent that developing countries would face new difficulties both in regard to trade and financial flows, especially as major developed nations, particularly USA, have run into huge deficits and debt-GDP ratios while unemployment is at unprecedented levels (USA 9.7 per cent) since the Great Depression. They would all remain looking inward.

Economic data in USA do not hold out hope for any rise in the near future in consumer demand for imports of cheaper goods from abroad as long as jobless numbers keep rising and this has already led to some weakening in the popular support base for the President. Global imbalances have become a major problem and the lesson drawn from the present crisis is all countries have to rebalance their economies so that the world does not get divided into surplus and deficit countries with serious implications for currency values and exchange rate management. Emerging economies cannot question the concept though they would be justified to seek gradualism in systemic changes which otherwise would adversely impact on growth and development of low-income countries.

A welcome development at the Pittsburgh is the decision to make G-20 the world's highest economic decision-making body so that all countries, advanced and leading developing countries, accounting for 85 per cent of global output, have an equal stake in the management of the world economy. Dr. Singh had pointed out that it was necessary for India to engage in the management of world's economy, 'because we have a lot at stake and a lot to contribute'.

To the extent that the world economy, though driven for the present by relatively faster economies like China, India, and other major developing countries, takes longer to regain the lost momentum, India's trade is unlikely to expand as fast as over the last five years while the country also cannot move into its coveted high-growth trajectory. Even at 6 per cent, India's growth is considered robust by world standards though without rapid growth, the country cannot give bigger thrusts for its poverty reduction programmes or secure fiscal consolidation.

Government does not expect that its current massive borrowings to finance the budget would crowd out private credit needs. Despite some softening in lending rates of commercial banks, in the wake of drastic reductions in key policy rates effected by RBI over the last several months, credit off-take has fallen far behind the levels of previous year though the private sector has difficulty in accessing external markets. Lately with some financial closures in infrastructure and other projects, there has been some rise in credit off-take.

A major problem for the Government is to come up with a credible medium-term framework to bring deficits to a sustainable level from the budgeted 6.8 per cent of GDP in 2009-10. The Finance Minister Mr Pranab Mukherjee hopes to contain fiscal deficit to 5.5 per cent next year and 4 per cent in 2011/12. With fiscal deficit in the first half at already excessive levels and additional requirements for drought relief are putting burden on the budget, the Finance Ministry is seeking to ease pressures through an economy drive and external assistance. The Finance Minister is expected to outline the fiscal consolidation framework while presenting his next budget in February 2010. (IPA Service)