Rising Inflation Could Hurt Economic Recovery

If inflation proves to be sticky, rising costs of capital for the government, companies and individuals could also restrict infrastructure spending and slow down private sector capex cycle

- Samar Srivastava & Salil Panchal

AS INDIA EMERGES FROM THE Covid-19 pandemic, rising inflation expectations have resulted in a slow uptick in borrowing costs for the government and companies alike. While these are still early days, the next year will be crucial in determining how India’s inflation trajectory progresses. Policymakers are clear they would like to avoid a repeat of a 2011-13 situation when high inflation and low growth derailed the growth story.

As the pandemic progressed, the government had been careful in its fiscal support for the economy. Much of the ₹20 lakh crore stimulus package it announced in May 2020 was in the form of food support and credit guarantees. The result was a manageable 9.5 percent fiscal deficit for the year ending March 2021 that included central, state and government enterprises borrowing. “To be fair, the central bank managed that borrowing with no disruption in the bond market,” says Ananth Narayan, associate professor of finance, SP Jain Institute of Management and Research.