The International Monetary Fund’s (IMF) ‘Global Financial Stability Report’ points out that several emerging economies are close to overheating as their output gaps-the difference between output and the potential output-are closing, while inflation remains elevated. The chart shows that there is no longer any output gap in India, which means companies are working almost at optimal capacity. Also notice how the real interest rate continues to be very negative-in fact India’s real interest rate (as computed by IMF) remains one of the lowest among emerging markets. This is exacerbated by the hugely negative fiscal balance. All these factors are signals of overheating in the Indian economy.
Also See | Real Interest Rate Remains Negative In India (PDF)
Garaphic by Yogesh Kumar/Mint
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