Financing the huge fiscal deficit from internal domestic savings would potentially crowd out private investment, thus lowering growth prospects. This, in turn, deter capital inflows, making it more difficult to finance the increasing CAD which in a sense is a result of global slowdown. Decelerating growth and persistence of high inflation Growth deceleration in India has not been accompanied by lower inflation (Chart 2).
With tight labor markets and little slack in product markets, we are led to conclude that significant persistent strength in the growth of nominal demand for goods and services, outstripping the likely rate of increase in capacity, will presumably be resisted by higher market interest rates.