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India's Economy Races Forward Despite Inflation Concerns

  • Anjana Pasricha

As India's economy grows at a scorching pace, high inflation and rising food prices are beginning to hurt the poor. Anjana Pasricha reports from New Delhi, the government says it is taking steps to moderate prices.

Durgawati earns $50 a month working as a part-time cleaning maid in Gurgaon, a posh area on Delhi's outskirts. A recent $5 raise in her salary means little to her.

Durgawati says despite the salary increase, she has had to cut down on the food she buys for her family, because prices of everything from lentils and grains to vegetables and milk have risen hugely in the last year.

India's booming economy has raised the standard of living for the 300 million-strong middle class. But the vast proportion of the country's poor are grappling with the inflation that has accompanied the boom. Inflation currently stands at more than 6.5 percent - its highest level in two years.

Property prices in some cities have more than doubled and apartment rentals are up by more than 50 percent in the last two years. The stock markets have risen more than fourfold over the past four years. Prices of steel and cement are at all-time highs.

The rising prices are causing concern that the economy may be overheating. For millions of poor people like Durgawati, a recent government forecast that the economy will grow at more than nine percent for the second year in a row has little meaning.

Inflation has begun to hit the headlines, however, and the government has gathered its top economic advisors to deal with the problem. It says lowering prices is a "key short-term priority."

Import duties on items such as cement and edible oils have been cut. The central bank has raised interest rates to curb a wave of buying on credit. There is also a proposal to lower fuel prices, which are partly blamed for stoking inflation. Economists are looking for these measures to have an impact over the next several months.

Saumitra Chaudhuri, an economic advisor with the credit rating agency ICRA, says inflation is always a key concern in rapidly growing economies. He credits the government with trying to solve the problem.

"If you are going to grow at 9.2 percent, 8.5 percent, or 8 percent, or any one of these levels, inflation will be something that you have to watch out for. If we don't take necessary steps, it can get a bit out of control, but I think the government on the fiscal side, and Central Bank on the monetary side, has been trying to get a fix on inflation," he said.

Political analyst Mahesh Rangarajan points out that the Congress Party came to power in 2004 on promises of improving the lives of the poor.

He says rising food prices could turn out to be political dynamite for the party, which is in the midst of state elections in the Punjab, Manipur and Uttaranchal this month. The country's most populous and politically significant state, Uttar Pradesh, goes to the polls in April.

"Historically inflation has been a very critical, political factor in India. It is logical, because one out of every four people is below as the poverty line, and a much larger number is probably just above that line," he said. "Given that the government came to power [and] Congress Party [is] saying it is the government of common man and woman - the common man and woman will be asking questions: what it has actually done for them?"

Independent political analyst Prem Shanka Jha says the government will have to pay more attention to those being left behind.

"Any rapid growth you are going to get winners and losers," he said. "It is part of our duty to be simultaneously thinking about the losers, even as we are applauding and delighting in the success of the winners."

Political analysts say the government will have to pay increasing attention to improving the lot of the poor as it prepares for national elections in two-years' time. Economists, meanwhile, worry that steps taken to rein in inflation could dampen economic growth.