Answer:

♤ India’s average growth during pre-crisis period was 8.7 per cent and it started fraying beginning with the global financial crisis. In the current macro-economic situation, the growth had significantly influenced by inflation. The balance of payments is under stress and investments have decelerated.

♤ First challenge before Indian economy is managing the ‘growth–inflation conundrum’. Inflation is driven by food inflation (both cyclical and structural), global commodity and fuel prices, and depreciation of currency and demand pressures. commodity prices, and depreciation and demand pressures. The growth-inflation dynamics of pre-crisis growth is quite different from post-crisis as the issue of inflation has become more rigorous and harsh, particularly to the lower strata of the bottom of pyramid.

♤ Hight growth needs easy money supply in the market, which results in more production and hence more employment which implies more demand. However the growth is limited by the resource availability. So if there is too much easy money in the market, it will lead to high inflation. This is what Indian economy faced after the fiscal stimulus given in wake of global financial crisis of 2008-09. Since then RBI has tried to put control on higher inflation by increasing the interest rates, which resulted in less money supply in the market and hence lower growth. While inflation pressure has still not come down to a comfortable level. So this is one of the main challenge where RBI needs to take a calibrated approach to maintain a balance between growth momentum and inflationary pressure.

♤ Second challenge before Indian economy is that it is no longer decoupled from external shocks. It is intricately linked to the world economy, international capital flows and to energy and fuel prices. Impact of European economic crisis, slow down of USA economy is noticeable on Indian economy. The slowing down of demand of

exports in foreign markets, less capital inflow in form of FDI/FII etc have started showing their effect in form of increasing current account deficit. This also resulted in devaluation of Indian rupee, creating further problems in managing the foreign- exchage reserves.

♤ Thirdly, the policy measures taken by the govt. for fiscal consolidation have defaulted. Over the past 15 years, India’s fiscal deficits have exceeded 5 percent in every year except in 2007. The deficit again widened during the global financial crisis due to fiscal stimulus and some political announcements like loan waivers etc. Also the fuel subsidies are putting extra pressure on government’s exchequer. Govt has made structural changes in economic policy by incorporating acts such as FRBM for fiscal consolidation and is trying to bring reforms in taxation like GST bill and DTC bill. However, achieving long-run fiscal consolidation still remains a challenging task to the policy makers.

♤ The govt. needs to find a holistic solution to these problems avoiding compartmentalized approach by individual ministries and centralized planning. There is a need of second round of economic reforms afresh.