The advance estimate of national income for 2011-12, released recently by the Central Statistical Organisation, points to a decline in India’s GDP growth rate, from 8.4 per cent last year, to 6.9 per this fiscal. Hurt by high inflation and decline in demand in interest-sensitive sectors, private final consumption expenditure, the largest component of aggregate demand, is expected to moderate to 6.5 per cent in 2011-12 from 8.1 per cent in 2010-11. Pace of capital formation is also expected to slip to crisis levels of 5.6 per cent. Indeed, even the latest industrial production figures with a meager 1.8 per cent growth for December, confirm the slowdown, with a worrisome de-growth of -16.5 per cent in the capital goods sector. While such moderation can in principle be tackled through demand augmenting policies, it leads to a strong possibility of reemergence of inflationary pressures once pent up demand from both consumers and industry show up. The service sector has again emerged as the prime mover; all the three broad groups under which the tertiary sector is classified in the national accounts statistics — trade, hotels, etc; finance, insurance etc; and community, social and personal services — are instrumental in pulling the real GDP up. Deceleration in the manufacturing and agricultural sectors, combined with a services sector growth is definitely inflationary. GDP deflator, a broad measure of inflation that includes services, has been estimated at 8.66 per cent, higher than the government/RBI’s estimate of 7 per cent WPI inflation by the end of March. Global food prices as per the FAO rose 1.9 per cent in January demonstrating the volatility in the international food markets; worries about weather conditions affecting 2012 crops in several major producing regions point to a further increase in February. Back home the agriculture, forestry and fishing sector is expected to record growth of just 2.5 per cent in its GDP during 2011-12, as against the previous year’s growth rate of 7.0 per cent. Within agriculture, the value of food grains production is expected to slow to 2.3 per cent as compared to 12.2 per cent in the previous agriculture year despite a record harvest of foodgrains, with new peaks in both rice and wheat production. This does not augur well for the supply-side. The Indian central bank has battled inflation through a high interest rate policy during the past fiscal and does not have much fire power left this time to tackle another surge in prices; indeed its rate reversal cycle may coincide with another bout of high global food price inflation. A production augmenting budget (and central bank policy) even if inflationary, is necessary for longer term development; this has to be backed-up by extremely prudent rationalisation and channelisation of subsidies to achieve the dual objectives of fiscal consolidation as well equitable distribution.