The RBI raised rates moderately again in January, as expected; while doing so it also raised the inflation estimate for March, again as expected. To some the hike was too feeble, a sign that the central bank is being too cautious, quite different from earlier years when rate hikes were universally being decried. Given that inflationary pressures are very strong, not just in India, but globally, especially when it comes to food and fuel, can we expect the RBI to come down stronger in the months ahead? We do not anticipate this happening, at this juncture. As we had flagged last May, this is a new RBI and the ?new RBI will do the bare minimum of what it is expected to on the inflation front?.

Of course, the RBI can easily push the rates up and take all the blame for curbing the great growth story. Right now, growth is still looking good. The IMF has set global growth up this year, compared to last year, this will augur well for India too. Though the IMF sets India?s growth lower at 8% in 2011-12, along with the government, we continue to expect a 9% growth in 2011-12 as a very achievable target. There are of course downside risks and inflation continues to stand at the top of the list. Yet, isn?t it true that the major push for this inflation surge has come from government policy that has paid little heed to changing the fundamentals, at removing bottlenecks that plague the system at every step? To take just one example, subsidies on kerosene, more than half of which are siphoned off, cannot be removed, says the Minister, it is ?politically infeasible?. The question remains, is it really politically infeasible to target the subsidies better? With crude oil prices heading upwards this year, it is even more crucial to work on this issue, any more delay will cost the economy. Look at the global trend in food prices and they are up again this year. How does the government plan to cushion the poor from this?

Why are we always caught up in this cycle that expects rate hikes to stop the economy from ?over heating? rather than pushing for unshackling the existing production and distribution systems that will set the whole economy on a higher growth and lower inflation path? All eyes on the budget now this month, to see what road map the government will put in on deficits, the aim should be to work toward growth without the accompanying inflation. With large ticket expenditure plans of the past few years pushing the fiscal deficit up, will there be any move to curb these plans? Or better still, if the expenditures cannot be reduced, as being ?politically infeasible?, can we have some structural changes, simple ones like changing the scope for NREGA for instance? With the NREGA wages now linked to inflation, it is important to revisit the scheme and the jobs that go with it, allow the money to be paid out for training and raising skills for instance.

As we see it now, our expectation is 9.2 % growth in 2011-12 with current levels of inflation through the year and slightly higher interest rate regime. We expect that industry will take this present moderate rate hike path in stride and services will power growth with transport, storage and communications in the lead. Of course, things could sour badly if inflation soars and higher rate hikes kick in, international developments hit trade crude and financial markets, erratic weather hits agri output etc. In the years ahead, we can have a combination of high growth and low inflation but a lot depends on how the fisc and food management plays out.