The strongest headwind that the economy is facing is that of inflation. Inflation closed at a likely 9% during the last financial year. That, to a great extent, was a result of high food inflation. While the food inflation is likely to be somewhat tamed (mainly through improved foodgrain arrivals although the problems of the delivery mechanism stays), there is every indication that non food inflation will jack up. Here’s why:
- The recent budget proposal to rollback earlier duty cuts
- Increase in oil prices, the full effect of its pass through to inflation is yet to be seen and with oil inching closer to USD 90 to a barrel, another round of price hike is in the offing
- Steel producers have already announced increase in their product prices
- After a lull in last year, corporate India is going to experience among the highest salary hikes this year as compared globally
- Currency appreciation – although this might help in reigning in the inflation a tad, it will hit exporters
Globally, sovereign default remains a big risk. And with strained government finances, exit from stimulus is no longer a choice. This, in itself, will reduce future growth. Add to this the vulnerability of Europe which, with the possible exception of Germany, is more susceptible to a double dip recession, and this year will prove to be quite challenging.