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Indias Cantilever Economy Essay

4165 words - 17 pages

Taking a high road
A strong, well-balanced recovery
Jun 1st 2010

ATHLETES competing in this year’s Commonwealth Games held in Delhi will travel to the stadium along the Barapullah Elevated Road, one of many transport projects sprouting up in India’s capital city. Half-built sections of the road loom dramatically over the streets below, as if straining to reach the concrete supports on the other side.
India’s economy has taken a similarly elevated route through the global financial turmoil. Its growth never fell below 5.8% (see chart), thanks to a timely fiscal splurge. But just as a cantilever cannot extend too far before it buckles, so an economy cannot place too much weight on a ...view middle of the document...

To compete in the auction, mobile operators have borrowed heavily, some from overseas. Instead of India’s government owing money to sleepy domestic bondholders then, India’s most dynamic companies now owe money to foreign creditors. Whether this helps the economy or not will depend on whether the government spends the auction proceeds better than the telecoms companies would have done.
If a slowdown in government outlays was welcome, a slowdown in private consumption, which grew by only 2.6% in the year to the first quarter, was not. The CII blamed this weakness on high prices, which have dogged the government’s second term. In a press conference on May 24th, Manmohan Singh, India’s prime minister, singled out inflation as a "matter of deep concern", but pointed to signs of a "moderating trend".
He’s right to point out that wholesale-price inflation has eased, from over 10% in February to 9.6% in April, compared with a year earlier. But even as the cost of foods (including manufactured foods, such as sugar and dairy) begins to fall, the price of other manufactured goods is gathering some momentum. The Reserve Bank of India (RBI), which has raised interest rates twice this year, still has work to do.
The pace of rate hikes will be governed by two imponderables: the monsoon, which is now sweeping up the coastal state of Kerala, and the squalls on world financial markets, which have swept outwards from Greece. If the monsoon lives up to expectations, the prospect of a good summer harvest will help to quell food inflation. That will, in turn, lower inflation expectations, making the RBI’s life easier. By the same token, bad financial weather may keep interest rates low around the globe. If so, the RBI will be wary of raising its own rates too far ahead of other central banks.
The RBI worries that higher rates could invite heavier inflows of foreign capital. This would push up the rupee, damaging India’s exporters. Overseas investors traditionally flee emerging markets in periods of global financial angst. But an economy growing at 8.6% may look a safer bet than the moribund markets of Europe and America. Rohini Malkani of Citigroup points out that Indian companies were able to borrow $4.3 billion overseas in March, the most they have in two years. Prominent among the companies raising money were India’s infrastructure firms and its telephone operators.
That leaves India’s policymakers with a big strategic decision. They could rebuff this foreign capital, by tightening caps, regulations and other restrictions on foreign investment. Or they could take advantage of it, betting that a stronger rupee is a worthwhile price to pay for faster telecoms networks and elevated roads over India’s congested city streets.
Comments :
1) This is a welcome sign and proves well beyond doubt that economy fundamentals are strong. This also proves that India is not just an export oriented country, and domestic consumption will drive GDP growth further.
But this...

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