Inflation could be causing plenty more problems for India. Not only is the rate very high but this inflation might have an effect on the growth of the country. Deputy chairperson of Planning Commission Montek Singh Ahluwalia said that inflation and increasing global fuel prices would impact India’s growth rate and it might fall down to eight per cent. Speaking to reporters after releasing the Sikkim Development Report, Montek said that, “I would be happy if the growth for this financial year is close to eight percent.” This news comes as a setback to India which had recorded a growth rate of nine percent for the financial year 2007-08.

However, he didn’t feel that India had to fear the impact of inflation in the long run. He believed that inflation is a short-term challenge and would not affect the growth rate on a medium to long-term basis. However, he added that, “Controlling inflation is an important short-term challenge,” he said. This is because if inflation is not added then it can spiral out of control, which many countries of the world have seen in the past. But he added, “If properly handled, it (inflation) should not affect the average growth objective of 9 per cent in the next five years”.

On June 14, inflation had touched a 13-year high of 11.42 percent. In order to tackle that, the RBI had hiked the short-term lending rate (repo) and the mandatory deposit that banks (cash reserve ratio) are required to park with the central bank by 50 basis points each. Earlier efforts of the bank to increase only one of these rates were not successful and lead to a further hike in inflation rate. Montek explained that this move would suck out liquidity from the system, thereby pushing banks to increase their lending rates. This is a very important step, as with reduced money in the economy to spend, the consumer demand would reduce, and this would curtail the increasing inflation. However, this also has a negative effect. A reduction in the supply of money in the economy would definitely hit the corporate sector hard and this would definitely impact growth.