Inflation should remain low in the current and coming fiscal years due to a strong agricultural output, lower taxes on goods, and weak domestic demand. The ADO 2009 forecasts inflation of 3.5% in the current fiscal year and 4% in the coming year as domestic markets recover and international commodities prices go up.
But there are serious risks and challenges ahead. Prolonged recession in the major industrial economies beyond the second quarter of fiscal 2010 could hamper India's recovery. Moreover, authorities should recognize that there is a trade off between short-term stimulus and long-run debt sustainability.
"It is imperative that the central Government bring down its deficit in the medium term to a manageable level in order to ensure long-term debt sustainability," says ADB Acting Chief Economist Jong-Wha Lee. "Expansionary fiscal policies could impair the confidence of investors unless clear signals are given that the present large deficits are truly temporary."
The latest global economic crisis has forced the government to set aside its plans for fiscal consolidation. The central government's budget deficit is estimated at 6% of GDP in the 2008 fiscal year, up from a targeted 2.5%. But off-budget items and deficits of state governments bring the estimated general government deficit to 10% of GDP.
ADO 2009 urged the government to review tax policy, the quality of public spending and the effectiveness of public programs to ensure that it has room for the infrastructure and social sector spending that is necessary for achieving rapid, longer-term inclusive growth.
