Indian Economy: High Inflation, Slowing Growth – an Indian Economy of Gloom?

New Delhi, 19 Aug 2008. Some Indians believe that India is protected from many of the economic hardships felt by other nations around the world. The country’s strong domestic economy and lack of reliance on Western nations means that it can shield itself from external hardships to a certain extent. That extent may have just been reached, however.

New Delhi, 19 Aug 2008. Some Indians believe that India is protected from many of the economic hardships felt by other nations around the world. The country’s strong domestic economy and lack of reliance on Western nations means that it can shield itself from external hardships to a certain extent. That extent may have just been reached, however. With inflation reaching 12.44% in August of 2008, almost triple what it was a year before and the highest in 13 years, India suddenly seems just as susceptible to financial troubles as the rest of the world .

Couple inflation with shortages of food and the picture becomes worse. Even with record grain production in the 2007-2008 season, the increased demand means an overall shortage.

“Despite the recent upward trend in food grains production, India’s food security remains an area of concern,” the Prime Minister’s Economic Advisory Council (EAC) said in its economic guidance for 2008-2009.

This gloomy message was echoed in the EAC’s more recent growth forecast, which was cut from 9.1% to 7.7% for 2009, weak by Indian standards. Developed nations can afford lower growth rates, with fewer people suffering from poverty and higher GDP levels.

Much as with China and the other emerging economies, India needs high growth rates so that better conditions can trickle down to the hundreds of millions still living subsistence lives. It could be argued that the need is more pressing in India, however, as democracy tends to amplify unhappiness. Indeed, Indian newspapers recently have been filled with gloomy pronouncements about the economy and the government.

Contributing to this negative sentiment are the credit crunch and oil prices.

In an effort to protect its citizens, the Indian government has absorbed much of this oil-price-rise, and has taken a hit in its trade, with a widening deficit. India is an import-dependent economy, which means by nature it would have a deficit. It produces almost none of its own oil which can be a major budget worry when energy prices get out of hand.

In fact, in early 2007, Prime Minister Singh asked Ali al-Naimi, Saudi Oil Minister, to help stabilize the oil market and to help keep prices at a level developing countries like India could manage. As we all know, that is easier said than done.

And with elections coming up soon, the government is dishing out incentives including 21% salary hikes across five million government employees, plus more than $15 billion in aid for struggling farmers.

These incentives have a feel-good factor but do nothing to help the country’s economic position. Meanwhile the elections themselves are a massive undertaking, involving more than 670 million people and quite a bit of expense. Put it all together and you have a growing costs, a widening deficit and slowing growth – plenty of cause, many would argue, for a bit of gloom.

Nevertheless, a growth of nearly 8% per year, consistently, would mean doubling the economy in just over a decade. And if India could sustain this growth rate until 2015, the Indian economy would surpass those of Italy, France, and the UK by 2015, and those of Germany, Japan and the US by 2050. Only China would be mightier at that point.

In fact, when we look at growth rates over the last five years, 7.7% growth would be just over the average of 7,35%:

Year GDP
2003 4.3%
2004 8.3%
2005 6.2%
2006 8.4%
2007 9.2%
2008 7.7%

Although there are plenty of reasons to be gloomy right now, the future continues to hold a lot of promise for India.

Santos de la Raya, EconomyWatch.com