While inflation has emerged as the key policy concern for the government, its fiscal position is under stress and there is widespread negative sentiment over the prospects of the Indian economy this year. Finance Secretary Duvvuri Subbarao spoke with Siddharth Zarabi and Rituparna Bhuyan on the prevailing economic scenario. Excerpts:

What is your assessment of the current inflation scenario considering that crude oil, edible oil and things that constitute two-thirds of the recent spurt?

Inflation close to 12 per cent is certainly beyond tolerance levels. Bringing it down is a priority. But there are challenges to doing so, because much of the inflation that we see today is 'imported'. In as much as the current bout of inflation has roots in global factors, purely domestic policy action is not enough to bring it down. We need a supportive global situation. There are some improved prospects � particularly by way of softening oil, food and metal prices at the global level.

Where do you see inflation headed, and also do you think that the fiscal and administrative steps have had an impact on price expectations?

Oil prices have started to come down, but it is too early to tell what level they will come down to and where they will stabilise. Several variables determine the global price of crude beyond simple supply-demand factors, such as the strength of the dollar, the speculative market and the global political situation. Food prices, at home and even at the global level, I think, will be more moderate than during the last season. Same for metals as the supply response seems to be kicking in.

So, I think, on all the global factors, we are beyond the inflexion point and should see inflation coming down. But there will be no significant respite for the next few months, and we will have to put up with a fairly high level of inflation.

When you say fairly high level of inflation, are you willing to put up a number to it?

I think double-digit inflation will persist for the next couple of months.

Do you feel that steps taken so far have had a moderating impact on inflation?

Most certainly. People keep asking why inflation is still high in spite of all the steps taken. The point is we do not factor in the counterfactual. If the government had not taken the fiscal policy actions, or administrative actions, or if the Reserve Bank of India [Get Quote] (RBI) had not tightened monetary policy, it is plausible that inflation would have been much higher.

Much of the positive effects of Budget 2008-09 in terms of trying to boost demand growth seem to have dissipated because of a variety of factors. How does it augur for growth, as there are fears that investment growth will decline?

Managing the growth-inflation trade-off is a tough call. That monetary tightening will compromise growth is an obvious concern. We in the government definitely share that concern. We are monitoring the situation. In particular, the finance minister is frequently in touch with trade and industry associations. The general feeling is still optimistic. The current situation is seen as a cyclical downturn, and I believe, investment intentions are still firm. After all, investment decisions are not made on just current interest rates.

Second, the inflation outlook is determined not just by input prices but also by output prices. Some manufacturers have raised prices to factor in input prices. So, it is not as if the entire industry sector is impacted uniformly by inflation.

What is your estimate for GDP growth and is a downward revision being looked at?

Not in hard numbers. There are many forecasts that are coming out, and most of them are from credible sources. Just on Tuesday (August 5), the RBI put out the results of their poll of experts, and there is broad agreement on a number like 7.9 per cent (GDP growth in 2008-09), which, by no means, will be a modest performance. This level of growth is definitely something to be proud of, especially at a time when the global economy is going through a downturn. I would say that the India growth story is still intact and what we are seeing is just a cyclical and small downward shift.

Critics say that the fiscal position of the Centre has been compromised, in part due to external factors, the oil subsidy bill and also due to the farm waiver and all that. There is sense that the real fiscal deficit could overshoot the Fiscal Responsibility and Budget Management (FRBM) target of 2.5 per cent for 2008-09. What is your comment about that?