In the absence of second-round effects, the relatively modest increase in unit labour costs, partly related to the fact that the pace of the recovery is moderate and there is still an output gap and a high rate of unemployment, is expected to help contain inflationary pressures. But several and significant upside risks surround this assessment.
Even though the stress in India’s BoP was unprecedented, the Government decided to honour all debt obligations without seeking any rescheduling (Reddy, 2006).4 In response to the BoP crisis, a combination of standard and unorthodox policies for stabilisation and structural change was undertaken to ensure that the crisis did not translate into generalised financial instability.