In May this year, inflation rose to a five month high of 6.01 percent triggered by factors such as weak monsoon coupled with crisis in Iraq. Though crisis in Iraq is not a worry right now, food inflation remains a major concern. Delay and weak monsoon has hit agricultural production which has resulted in rising prices of food items.
The Finance Minister has stated that inflation has gone "beyond acceptable limits" and hinted to take take bold steps to curb it. We have to wait and see what bold steps the Finance Minister will take to bring down inflation.
Read more on why food inflation continues to remain sticky in India here.
Economic growth has slowed down. GDP that shows how well an economy is doing is at 4.7 per cent for the FY14, marginally lower than the expectation of 4.6 per cent. GDP remains lower than 5 per cent which is hurting the economic growth of the country. Read more on GDP here.
Reviving growth and GDP is a tough challenge for the new Finance Minister due to weak revenues, increasing fiscal deficit and a weak monsoon. Low export due to adverse global economic climate is adding to concerns.
Increasing Fiscal Deficit
Fiscal deficit remains high and it's a challenge for the new government to strike a balance between rising expenditure and income. High subsidies on fuel, fertilizers, food etc., on the expenditure side weighs on fiscal deficit.
According to Moody "Indian economy is exposed to "shocks" on account of high fiscal deficit and the country's credit outlook will depend on government's initiatives in the next month's budget to contain expenditure and reduce exposure to global commodity prices ." CRISIL has predicted that implementation of Goods and Services Tax (GST) will help to reduce the surging fiscal deficit.
Tax issue is another major concern in the budget. Right from income tax slabs to retrospective tax, government has lots of areas to look at and bring changes. Presently, everyone is demanding a raise in the Income Tax slab to Rs 3 lakhs. Read here to know more on the 6 tax issues the government needs to address.
Expectations are high regarding reduction in Central Sales Tax (CST) and excise duty to boost the economy. Similarly everyone is waiting for the passing of Direct Tax code (DTX) in parliament and implementation of Goods and Services Tax. Amendment to the retrospective tax is another critical issue to gain confidence of foreign investors.
Click here to read what is GST?
Raising interest rates
Borrowing remains costly as the RBI has kept the key interest rates high as inflation rears its head again. Only the Statutory liquidity ratio (SLR) had been cut by 50 bps to 22.5 per cent which would help in infusing additional liquidity in the economy.
However, if inflation increases further RBI may nudge interest rates higher. According to RBI, ""The Reserve Bank remains committed to keeping the economy on a disinflationary course, taking CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016. If the economy stays on this course, further policy tightening will not be warranted."
After the election expectations towards the new stable government has increased manifolded. Though all the economic woes cannot be washed away so fast still few "bold" stable steps may help to strengthen the economy in future.