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With prices rising twice as fast as in China, is India overheating?

With prices rising twice as fast as in China, is India overheating?
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First Published: Mon, Feb 12 2007. 12 38 AM IST
Updated: Mon, Feb 12 2007. 12 38 AM IST
Mumbai: Prime Minister Manmohan Singh and his closest economic advisors gathered last weekend over fears that India's extraordinary economic expansion was starting to overheat, an issue they labelled as a “key short-term priority”.
They may have waited too long.
Food prices are climbing for everything from lentils to onions, squeezing the poor. Apartment rents and prices are rising steeply, especially, in large cities. Factories that make the country’s increasingly ubiquitous motorcycles are running at full tilt and have still fallen weeks behind in meeting orders from dealers.
Inflation remains much lower than in many developing countries. But prices are rising more than twice as fast as in China, arch-rival for foreign investment and economic leadership among emerging markets. Prices are also increasing considerably faster than in industrialized countries. That has put the onus on government leaders to try steering the economy, which is expected to expand by as much as 10% this year, away from a possible escalation of inflation pressures that could derail some of their achievements and temper the country’s climb in living standards.
“There is a recognition of these pressures and there is virtual unanimity that these have to be managed,” Y. Venugopal Reddy, the governor of the central bank said in an interview this week. On 31 January, RBI raised a key short-term interest rate by a quarter-point, to 7.5%, to help stem inflation.
Singh, Reddy and other senior officials have repeatedly reaffirmed their commitment in recent days to the market-oriented policies that have helped to triple the economy's growth rate since the early 1990s.
But rising prices are starting to rekindle some nostalgia for the 1980s, when India had one of the world's most highly regulated economies.
“You have to ensure some amount of price regulation,” said Suhel Seth, a political commentator and marketing consultant. “Under the guise of a free market, you’ve created a free fall for the poor.”
Government economists attribute rising food prices here to global factors like a poor harvest in Australia, the growing use of crops to produce ethanol and a higher cost of diesel for tractors. But many here link the increase to the government’s encouragement of futures trading in agricultural commodities, and the government has responded this winter by limiting a few types of transactions involving food.
Reddy said he felt “some justifiable optimism” about inflation and the economy. He pointed to the lagged effects of interest rate increases over the last year that had not yetfully worked their way through the economy.
The central bank governer also noted that Indian companies were investing in additional capacity and that new roads, loading docks and other infrastructure were being built.
Still, the central bank’s surveys show that practically all of India's manufacturers are operating at full capacity, as consumer demand has risen first and companies have been slower to respond.
Many factory expansions and new factories will be ready in 18 months to two years, Reddy said, describing the time until then as a transitional period for the economy.
Awash with deposits derived from foreign investors, Indian banks have been lending aggressively, particularly to consumers. That has led to a wave of buying on credit.
Rahim K. Premji, the manager of Allibhai Premji Tyrewalla, a motorcycle store here, said that there had been so many buyers nationwide that for the last six months, motorcycle factories had typically been 15 days late in filling orders.
“It used to be you’d place your order and they’d dispatch it right away,” he said. “They’ve constantly been expanding capacity, but not as fast as demand.”
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First Published: Mon, Feb 12 2007. 12 38 AM IST
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