The Union government is expected to continue tightening the monetary policy to address an overheating economy, but this would not likely result in the same mid-1990’s slump, leading economists said.
“The pessimists argue that excessive monetary tightening in the 1990s crippled industrial recovery, and that a similar outcome is likely in 2007,” Rajeev Malik, an economist at JPMorgan Chase Bank Singapore, said. He said that monetary tightening to check inflation was not the trigger forthe sharp deceleration in industrial activity in the mid-1990s, which instead was caused by a correction to the over-investment that followed the 1991 economic reforms.
Discussions on the economy heated up last week with a conference held on Saturday in Mumbai by Indian Council for Research on International Economic Relations (Icrier) and an analysis released by global investment banks Lehman Brothers and JP Morgan Chase Bank Singapore.
Economists also said today’s economic growth is more sustainable and would not crumble under stronger controls. Malik cited factors such as 2007’s stable political environment, and disciplined corporations and entrepreneurs.
At the ICRIER conference, Joshua Felman, senior resident representative at the International Monetary Fund’s New Delhi office, said his personal analysis is that “India’s boom is for real”, and different than the 1990s. Despite concerns about rising interest rates killing the boom, he said the rate remains relatively low compared to the past—particularly the mid-1990s—and compared to other emerging markets.
The government will continue to use stronger monetary policy to curtail rising prices, experts said, despite concerns in the marketplace.
“Expenditure expansion in the Budget along with strong growth (we expect GDP to grow by 9.4% in 2007) and the government’s concern about inflation indicate tighter monetary policy ahead,” said Rob Subbaraman and Sonal Varma, analysts at Lehman Brothers.
They expect the central key rates to be hiked by 50 basis points this year. One basis point is 100th of a percentage point. Felman said the economy is overheating as aggregate demand is outstripping supply, and sound monetary policy will help contain the problem and sustain growth.