Can Chidambaram Mend the Indian Economy?

New Challenges Awaiting

Government’s failure in implementing structural reforms has resulted in high inflation. Despite the fading economic growth, the high inflation has made it difficult for Reserve Bank of India to cut interest rates significantly.

The latest quarterly growth figures showed a nine-year low of 5.3 percent, while the inflation has been running at above 7 percent. On July 31, RBI predicted more economic pain, lowering its growth projection for financial 2012/13 (April-March) to 6.5 percent from 7.3 and raising its inflation forecast for March 2013 to 7 percent from 6.5.

Higher spending on subsidies and sluggish tax receipts has overstuffed the fiscal deficit. The current account gap, policy flip-flops and disappearing global appetite for risk have also affected the rupee in this financial year.

The disappointing summer monsoon rains have also made matters worse. It has already hinted a drought, which could force higher public spending and aggravate the government’s fiscal troubles.