Call it political foresight or monetary balancing, but there's little denying that the wise men in charge of the Indian economy have assigned top priority to inflation over growth. There's no other choice. As Amit Tandon, Managing Director, Fitch Ratings, remarks: "Inflation pinches every soul on earth, whilst the fruits of growth don't reach everybody." So if Y.V. Reddy, Governor, Reserve Bank of India, has jacked up interest rates by 3 per cent in the past one and a half years, it's with good reason. Clearly, Reddy is attempting to slow down the gravy train of growth. And that's reflected in the revised (downwards) estimates of the gross domestic product (GDP) of various monetary agenices (see Growth is the Casualty).

"The government has rightly addressed the fiscal issues by adjusting customs and excise duties, but it has gone a bit overboard in monetary tightening to contain inflation. Inflation can be checked only by addressing the supply side issues " Rahul Bajaj Chairman/ Bajaj Auto

So amongst the various GDP constituents, where will the tapering-off be felt the most. Answer? In manufacturing, without a doubt. Manufacturing contributes 20 per cent to GDP, agriculture another 20 per cent and services accounts for the rest. In 2006-07, the manufacturing sector grew by 10.1 per cent, up from 7.9 per cent in the previous year. Experts don't expect that breathless pace to be maintained in the current year, and predictions in the 7-8 per cent range are doing the rounds. What could come to the economy's rescue is the agriculture sector, if it's backed by a good monsoon. And Finance Minister P. Chidambaram is hopeful. Last fortnight, on a visit to Hong Kong, he remarked that "healthy agriculture growth could even push GDP to 10 per cent". That could be considered optimistic given the recent track record on the agriculture front, where growth decelerated from 3.7 per cent in 2005-06 to 2.6 per cent in 2006-07. The services sector, too, has the potential to fill in for manufacturing but here too industries like it services and it-enabled services are being buffeted by a shortage of competent and skilled manpower and rising real estate costs.

The huge shadow of a possible recession in the US also looms large over the Indian economy (Alan Greenspan, a former Chairman of the US Federal Reserve, recently said that a recession is a possibility though not a probability). The US is India's largest trading partner, with a share of over 15 per cent followed by the UAE and Singapore. The dependence of the IT and ITEs sectors on the US is also quite large. "An economic recession in the US would definitely have an adverse impact on our economic growth," believes P.K. Choudhury, Vice Chairman, ICRA. But there are experts who differ. "Any softness in us interest rates following a slowdown will result in the lowering of interest rates in the Euro zone and probably in Japan; this in a way is good news for India as interest rates will eventually go down," explains Ravi Mohan, CEO, CRISIL. Mohan adds that the reliance of world economies on the US has come down over the last 2-3 years, with Japan and parts of Europe coming into their own. "The share of the US in the overall global trade is far less than what it was some three years ago," explains Mohan.

"The slowdown in the us will affect China, which is a big exporter to the us and other Latin American economies," believes V.P. Singh, Director, Deloitte Touche Tohmatsu. And if China slows down, economists argue that the ripple effects could be felt back home. What's more, an overall global slowdown will simply mean reduced exports, and inflows of foreign investment (both direct and portfolio). The silver lining for India is its huge domestic market on which it can rely. But if inflation continues to rear its ugly head and interest rates keep nudging up, the domestic consumption-driven economy may just lose some steam.