Inflation surge to 8.56% -- Economists want stimulus packages to be revoked to balance

The government on Monday said inflation surged to 8.56 per cent in January, the highest in over 13 months, ahead of the Union Budget for 2010-11 that would spell out the stance on stimulus packages.

Inflation, which has already breached the RBI's estimate of 8.5 (rpt) 8.5 per cent, has also fuelled concerns that the apex bank could further tighten the monetary measures initiated earlier this month in its third quarter monetary policy review.


  Projecting that inflation would touch 8.5 (rpt) 8.5 per cent by current fiscal-end, the RBI had sucked out about Rs 36,000 crore from the banking system to check the rising prices.  Over one-year high inflation was led by costlier sugar and potato prices. Sugar rates rose by 58.96 per cent while potatoes turned costlier 53.39 per cent.

Economists predict inflation to reach 10 per cent by fiscal-end, making the roll back of stimulus measures a tricky issue for Finance Minister Pranab Mukherjee.  "There is a tough balancing act ...in the Budget. If he withdraws stimulus then it would put pressure on inflation.  However, withdrawing stimulus is necessary to reduce fiscal deficit," Crisil Principal Economist D K Joshi said.  In the wake of the global slowdown in 2008, the government had announced many sops, including cut in excise duty, to prop up the then slowing economy.

Now that the industrial growth is also at 16-month high of 16.8 (December), experts feel the upcoming Budget may see stimulus being withdrawn.  Investors' fear about the government rolling back stimulus had the benchmark Sensex on BSE closing down by over 100 points.