Not only UPA-II had demonstrated its inability to control inflation which in its third year remains stubbornly close to double digit but also is besieged with a maze of intractable issues like corruption and land acquisition, which has turned the political scene messy. With governance failures writ large and policy reforms yet to gain traction, the Government is in a desperate quest to give itself a modicum of credibility for the future. Recurrence of terrorist attacks has thrown up gaps in internal security.

The challenges, political and economic, are becoming greater for the latter part of the UPA’s second term. On the one hand, the social activist Anna Hazare, having covered himself with glory, after holding the Government to ransom by his successful fast, is hurling a new threat almost every day. Aided by a dedicated team and a mass awakening, his goal seems to be a root-and-branch reform of government and nation itself. Whatever the logic behind his moves, his capacity to create trouble for Government cannot be gainsaid.

On the other, the leading opposition party, BJP, joining the Anna bandwagon now and then to make political gains, is also mounting another country-wide ‘yatra’, by its towering and highly articulate leader, Mr L K Advani, ostensibly to battle corruption but with the unconcealed objective of forging opinion against the UPA-II Government. His line is that having already “exhausted its mandate” by its record of failures, UPA must call for midterm elections. Price rise would be one of his major thrusts.

Parliament’s monsoon session had an abrupt end without any significant enactment, despite the heavy legislative agenda, financial and others. The BJP-led opposition used up the entire session to embarrass and discredit Government. There was hardly any room for a political consensus on reforms or other major policies and all the controversial issues including land and food security are now back-loaded for the winter session,

Meanwhile, the Reserve Bank which is to announce its mid-quarterly policy review on September 16 has come under pressure from the apex chambers and sectional interests to halt further hikes in the key interest rate (repo), which now stands at 8 per cent, in view of signs of decline in factory output and credit offtake. They attribute weak business confidence and investment slowdown to the high lending rates as well as the fiscal and debt crises in advanced economies which are threatening a global recession.

With the first quarter GDP (April-June) slowing to 7.7 per cent, a case is sought to be made out that it is time for the central bank to make a pause or even signal end to policy tightening. The general expectation both within Government and outside and abroad is that Indian economy would still remain one of the fastest even with 8 per cent while the RBI has placed it at “around 8 per cent”. The Finance Minister Mr Pranab Mukherjee remains confident that growth would be around 8.5 per cent while all efforts would be made to adhere to the fiscal deficit target of 4.6 per cent in 2011-12.

Economic data present a mixed picture with no slackening in consumer demand while performance in some segments of manufacture are doing better than last year, apart from robust growth (54 per cent) in exports in April-August despite weak post-crisis recovery in major advanced economies (USA and EU). While global developments including financial markets and commodity prices are fully taken into account by RBI in adjusting policy rates, its concerns are focused even more on the domestic situation.

Inflation has remained generalized with non-food inflation above comfort levels. Food inflation was still close to double digit in the last week of August. Nor Government has been able to tighten the fiscal belt and with rising subsidies, and incomplete pass-through of the rise in global oil prices to retail levels, the sustainability of Government’s fiscal deficit target is highly doubtful. The lack of complementary response on both demand and supply sides makes the task of the monetary authority difficult and any fiscal over-run makes inflation fighting that much harder.

RBI has been working on a trajectory of monetary policy actions leading to moderation of inflation by around 7 per cent at the end of the current fiscal year. Developments thus far, especially after the July 26 first quarter review by RBI do not warrant a pause which would send out a wrong signal of the central bank reaching the end of its tightening stance. Analysts point out but for the strong actions taken by RBI so far with effective tightening by 475 points, the annual rate of inflation would have been higher than what it is at present.

The WPI for August would be available on September 14 and it would be taken into account by RBI, along with the new risks in global scene, in its latest assessment to be announced on Friday. Defending the current policy stance, RBI officials point out that inflation” imposes real costs which are borne disproportionately by the different segments of the economy”. Prolonged high inflation gives rise to increased inflation expectations and cause general prices to rise.

While growth has moderated somewhat, RBI would begin to ease policy only if it perceives a broadbased slowdown of the economy, which would also get reflected in tax receipts, corporate incomes and credit demand. Credit offtake so far has not gone significantly out of line with projections. In any case by the end of October, the mid-year review of monetary policy should be more forthcoming on the question if and when RBI expects to be able to move toward an easing of its current stance. (IPA Service)