India's Economy: Limping Along
Image Credit: Wikicommons

India's Economy: Limping Along


Stagflation is a term most associated with the post oil-shock 1970s, with prices rising despite economic growth and output falling.  It is a term that could soon (with a few modifications due to the country’s emerging market status) become applicable to India, given that the latest economic data point to serious issues in the economy.  The Reserve Bank of India (RBI) is in the unenviable position of balancing inflation and growth risks.

Inflation data released Wednesday showed that prices continue to increase at a still high rate of 7.45% year-on-year (YoY) in October. Although this YoY increase was lower than September’s figure, it is still uncomfortably high for the economy.  The release also revised August’s rate up to 8%, a second dose of unwelcome news.

Despite the persistently high inflation figures, the RBI thus far has not elected to increase its key interest rate level from the 8% it affirmed during its last meeting two weeks ago.  It is clear that the RBI feels unable to move aggressively against inflation due to other economic data, which is decidedly gloomy and perhaps an even bigger risk than rising prices.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

India’s Industrial Production (IP) during September, for example, decreased by 0.4% YoY, data released earlier this week showed.  Meanwhile, October’s trade deficit (which drags on growth) climbed to U.S. $21billion, the highest total on record.  Prime Minister Singh blamed the current account deficit on weak external demand combined with rising commodity prices, especially for petroleum related products, and it is not clear which of these issues is going to improve in the near term.  Other indicators show that investment is also declining and certain borrowers are feeling financial distress – leading to repayment difficulties at corporations and an increase in “restructuring” of debt.  

The government remains confident that the economy can grow. Last week Finance Minister P. Chidambaram predicted 5.5-6% GDP growth this year, and a return to 7% growth for 2013.  The International Monetary Fund (IMF) is less optimistic, predicting that Indian growth will drop to 4.9% this year.  Even if the government’s prediction is met, 2012 is going to register the lowest rate of Indian GDP expansion for years, and excluding the 2008 crisis year, for more than a decade.

Hence the pressure on the RBI to cut interest rates is heavy, and is increasing as data continues to disappoint. The RBI is maintaining that inflation is its primary concern and is thus not moving interest rates to counter the growth slide, a move which might also weaken the currency and thus exacerbate the trade deficit in the near term.  In short, the RBI’s key interest rate is probably going to stay unchanged, as pressure to cut from the slowing economy cancels out inflationary pressure to increase it.

Sign up for our weekly newsletter
The Diplomat Brief