Is Indian economy overheating?
New Delhi, April 29:
From hefty pay hikes and foreign vacations to new houses bought with cheap mortgages, India’s middle class had never had it so good, riding the past four years’ unprecedented economic boom.
But now, a spike in inflation is playing party pooper.
High economic growth, averaging more than 8.5 per cent annually since 2003, has spurred demand and caused prices to rise so much that consumers are starting to get squeezed. That could make it more difficult for people to repay loans, which have grown at a faster rate than incomes have risen.
With real estate and stock prices at record highs, fears are growing that a financial crisis might be brewing if borrowers can’t repay loans. If that were to happen, it would dash hopes that India’s rapid growth would lift millions out of poverty. Overseas investors who have been dumping billions into the economy, would also be hurt.
To cool growth, the central bank has raised interest rates several times over the last year, forcing commercial banks and housing lenders to increase lending rates, causing consumers with adjustable rate loans - popular among the urban middle class - to see their monthly payments balloon.
Sushil Aaron, a researcher at a diplomatic mission in New Delhi, bought an apartment last summer even as housing prices soared. But now he has put off plans to replace his old car and has stopped buying books because his monthly mortgage payment has jumped more than 20 per cent to $1,000. “It’s a double whammy,” he said, referring to surging housing prices and rising rates.
People like Aaron are complaining despite forecasts from consulting firm Hewitt Associates that salary increases at Indian companies will average 15 per cent in 2007, topping Asian countries for the fourth straight year.
But the millions of poor laborers, who have seen only meager pay hikes, have been hit particularly hard as costs of basic commodities such as cooking oil and vegetables have nearly doubled in the past three years.
The inflation rate, based on wholesale prices, touched a two-year high of 6.73 per cent on Feb. 17 and has since mostly stayed above 6 per cent, but retail prices have risen as much as 10 per cent from a year ago.
Virender Negi, a driver for a New Delhi-based export firm, has stopped buying milk for his two children because his monthly salary of $130 is no longer enough to pay for grocery and house rent.
“At this rate, I will never be able to make my ends meet,” said Negi, who has been borrowing from friends and relatives for about a year to balance his family budget. “I have no money to pay my (6-year-old) daughter’s school fees.”
The Reserve Bank of India, the nation’s central bank, first spotted what it called “signs of overheating” in November. But officials in the federal government brushed it off until the governing Congress party lost elections in two states because of voters’ resentment over rising prices.
The government then reduced import duties and banned futures trading for several essential commodities to ease supplies. It also ordered state-run oil companies to cut fuel prices.
But the impact of those moves, which some analysts saw as coming too late, has been limited, and much of the inflation-fighting task is left to the Reserve Bank of India, which has raised rates three times since December.
The RBI has also increased the cash reserve ratio, the proportion of deposits that commercial banks must hold in cash, three times since December so to lower the amount of money in circulation.