Accessibility links

Indian Economy Hit by Inflation Stoking Fears of Overheating 

India's racing economic growth has hit some roadblocks. Interest rates have been raised, repeatedly, yet inflation continues to run high, raising fears that the economy is overheating. From New Delhi, Anjana Pasricha reports on how consumers and industries in one of the world's fastest-growing economies are coping.

Raghav Dhir took out a $50,000 loan, last year, to buy an apartment in New Delhi. Property prices were soaring as the economy boomed, but low interest rates prompted Dhir, 32, to make the purchase.

But his plans for more spending have been put on hold. Dhir's mortgage payment has jumped more than 20 percent after three interest rate increases by the Central Bank in the past six months.

Dhir says the higher monthly payment he has to fork out is beginning to hurt despite his recent salary raise.

"I thought I would buy a new car as well, but I have postponed plans for that," he said.

Expanding incomes for India's growing middle class have stoked a consumer boom and led to surging demand for everything from cars to homes in the past several years. But rising interest rates have dented the optimism of the middle class.

At the same time, consumer prices are touching new highs. Concerns are growing that India's economy is showing signs of overheating: high growth coupled with high inflation, and a currency that is rising in value against the dollar.

Economists say the Central Bank's interest rate increases are aimed at cooling the economy by limiting the flow of easy credit. The Central Bank also wants to stabilize prices that affect the poor, such as food costs.

But business leaders are concerned that the monetary tightening will slow down an economy that has been gaining more than eight percent annually over the past four years.

The chief economist at the Federation of Indian Chambers of Commerce, Anjan Roy, says a recent survey reveals that business confidence is a little bruised.

"Rising interest rates will hurt industry," said Roy. "Industries which are interacting with consumers, their confidence level is going down. If interest rates are going up, then house purchases will go down."

The automobile industry and the banking sector also could be hurt as consumers cut back on buying expensive items on credit. Automakers say car sales already have hit a 13-month low.

Companies warn that profit margins are getting squeezed as the rupee sits at a nine-year high against the dollar. In just a year, the Indian currency has appreciated by more than 13 percent versus the dollar. In addition, high property prices and massive wage increases are making new investments for industry more expensive.

P.K. Chaudhury, managing director of the Indian Investment and Credit Rating Agency, known as ICRA, in New Delhi, says the rising rupee is being watched closely by India's services industry. A strong rupee means Indian goods and services are more expensive to foreign customers.

"Substantial growth is dependent on services sector like [the] I.T. [information technology] sector, and there the invoices are mostly dollar denominated, and U.S. in [is a] major partner, and that is major cause of concern. What they are trying to do is, they are trying to improve on their productivity," said Chaudhury.

T.K. Bhaumik, an economist with India's largest private-sector company, Reliance Industries, says while large industries may not be affected, small and medium sized manufacturing businesses could be hurt as domestic prices rise.

"They are the ones who cannot go overseas and borrow money, they would suffer from the burden of high interest rates, and obviously I would expect some small and medium industries to fall by the wayside," he said.

However, many economists think that a marginal slowing may not be a bad thing. Factories are operating at full capacity now. Infrastructure bottlenecks such as clogged airports, inadequate roads and ports are intensifying. If production slows slightly, it could allow time to expand overburdened facilities.

Despite the concerns, economists remain optimistic about the prospects for India's economy. They point out that outside investors continue to flock to the country, and the growing middle class is still regarded as a huge potential market.

ICRA's P.K. Chaudhury is confident that although a few companies may falter, overall, industry can withstand a strong rupee and higher interest rates.

"What my conviction is that all this are going to have minor problems, there will be adjustments here and there, but ultimately it is not going to seriously impact the growth potential of the economy," added Chaudhury.

Most international financial agencies, such as the World Bank, predict that India's growth this year will slow marginally from last year's 9.2 percent, but say that the economy remains buoyant.