Seesaw economics. Will it balance?

The Wholesale Price Index turned negative in January, falling by 0.39%, from +0.1% in December, due to falling oil and commodity prices. Fuel prices fell by 10.69%, but have gone up a tad since then, but food prices increased by 8% which caused the Consumer Price Index to rise to 5.11% from 4.28% in December, which is well within the Reserve Bank's target of 6% by 2016. One would have expected vegetables and fruits to be cheaper because they are transported by trucks so the rise in their prices indicate structural problems. Industrial output grew by an anemic 1.7% in December. The RBI unexpectedly reduced the repo rate by 25 basis points in January to 7.75%, signalling its bias towards lower rates so the new figures have heightened expectations for steeper rate cuts. Raghuram Rajan, the Governor of the RBI, has indicated that he wants real interest rate to be 150 to 200 basis points higher than retail inflation, to encourage people to save in financial instruments, rather than buy gold, so if the CPI stays at around 5% he can cut the repo rate by a maximum of 75 basis points. There is much debate on whether a real rate 200 basis points will be enough to lure people away from gold. That depends on whether people have surplus funds to invest after paying India's extortionate taxes and constantly rising food and electricity prices. An enormous trap for the RBI will be the fiscal deficit in the coming financial year which will be unveiled in the budget at the end of this month. There are calls for the government to stimulate growth by increasing spending on infrastructure but that may only add to the fiscal deficit and to inflation. In 2008 emerging market economies spent heavily to stimulate growth, to compensate for lower growth of the rich countries, but that did not last and growth rates have fallen. Brazil and Russia are in recession, China sees falling growth and India is only now getting a handle on soaring inflation. Curiously, low inflation maybe increasing the discomfort of the government as high inflation decreases debt/GDP ratio which fell from 90% in 2003-04 to 68.5% in 2013-14 because of double digit inflation unleashed by the Congress. Prof Jagdish Bhagwati believes that the government should start spending only when revenues flow in but the problem with that is that revenues cannot increase without growth and to increase growth we need massive spending on infrastructure. No one is mentioning the real elephant in the room, which is real estate prices. Real estate has become so expensive that sales have almost dried up but prices are still rising. Prices need to fall by 70% to reflect real market rates but everyone is terrified to see it happen. It is like a seesaw - when one side goes up another goes down.