India's new government reveals plan for jobs, low inflation

Jun 09 2014, 22:49 IST
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Economy in its longest slump for a quarter century Economy in its longest slump for a quarter century
SummaryEconomy in its longest slump for a quarter century

India's new government will use public and private investment to create jobs for the millions who enter the workforce every year and will make containing inflation its top priority, President Pranab Mukherjee told parliament on Monday.

Outlining Prime Minister Narendra Modi's economic plan following his landslide election victory last month, Mukherjee said the government would introduce a general sales tax, encourage foreign investment and speed up approvals for major business projects. It would also tackle bottlenecks that have caused food prices to rise more quickly in India than in any other major economy.

Although Asia's third-largest economy is in its longest slump for a quarter-century, consumer inflation has been stuck at an average of nearly 10 percent for the past two years and was one of the main issues that brought Modi to the helm of the world's largest democracy.

Ten million people enter the workforce every year as the largest youth bulge the world has ever seen reaches working age. The demographic shift may help propel India into the league of developed nations, but risks causing economic and social disaster if it is not harnessed effectively.

The anti-inflationary message will be welcomed by central bank governor Raghuram Rajan, who has made lowering India's growth-stifling high interest rates contingent on containing consumer prices. However, dampening prices will not be easy.

Shortages of warehousing, a dependence on monsoon rains and a complex network of middlemen that leads to price gouging and irregular supplies of vegetables in mainly vegetarian India is blamed for much of the volatility. Last August, onion prices soared by an annual 245 percent.

Forecasts suggesting there will be less rain than normal this year add to the government's headaches.

Some of the new government's proposals to fix the problems by clamping down on "hoarders" and building more cold storage are not new, but hopes now rest on Modi's reputation for delivering on his promises.

"We are committed to breaking this vicious cycle of high inflation and high interest rates," Finance Minister Arun Jaitley said on Monday in a pre-budget speech to state governments.

When Jaitley delivers the budget in early July, he will try to balance reducing inflation with the need to revive economic growth from its second year below 5 percent.

Some advisers to Modi and Jaitley have suggested loosening the purse strings to quickly stimulate the economy. Others favour slashing the deficit to 3.8 percent of GDP this fiscal year, even faster than the 4.1 percent

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