Tackling high fiscal deficit will be an onerous task, says OECD.
With inflation showing signs of building up with signs of revival in the economy in the domestic sectors, the Organisation for Economic Cooperation and Development (OECD) said that choosing the right time for withdrawal of the fiscal and monetary stimulus would be a major challenge for policy makers.
In its India economic outlook report, OECD has projected a 7.3 per cent growth in 2010 and 7.6 per cent in 2011 with a high incidence of inflation. ``Given the resurgence of inflationary pressures so early in the recovery, a key challenge facing the policy makers is ensuring a timely withdrawal of fiscal and monetary policy stimulus,'' it said.
The report projects the wholesale price inflation at 3.5 per cent in 2009, and sharply higher at 7 per cent next year and a tad lower at 6.2 per cent the year after. However, retail inflation, which pinches consumers the most, is pegged at 7.8 per cent in 2009, a bit lower at 7.1 per cent next year and still down at 6.2 per cent in 2011.
It indicates that the economic momentum is strengthening and the deficient monsoon this year would have only a moderate impact on the recovery, said the report.
"In the near-term, the ongoing recovery will be only modestly hampered by the poor monsoons," it said.
Stating that tackling high fiscal deficit that followed the stimulus packages would be an onerous task, the report said reining in the large fiscal deficit, which has widened further in 2009, would be particularly difficult given both its magnitude and the permanent nature of recent increases in spending.
In its fiscal stimulus packages, the government has cut excise duty by 6 percentage points and service tax by 2 percentage points, besides increasing Plan expenditure to perk up the economy.
The Reserve Bank of India has also cut policy rates and other tools to reduce interest rates and increase money supply