India Finds Its Economy on the Verge of Overheating
MUMBAI, India — With breakneck growth, an outsourcing industry that
leads the world and hundreds of millions of consumers demanding more
class and comfort, India has an economy many countries would envy.
But now, after three years of near double-digit growth, signs of a
potentially dangerous inflationary spiral are beginning to emerge.
Prime Minister Manmohan Singh and his closest economic advisors gathered
just last weekend over fears that India’s extraordinary economic expansion
was starting to overheat, an issue they labeled as a “key short-term
They may have waited too long. Food prices are climbing for everything
from lentils to onions, squeezing the poor. Apartment rents and prices
are rising steeply, especially in large cities. Factories that make
the country’s increasingly ubiquitous motorcycles are running at full
tilt and have still fallen weeks behind in meeting orders from dealers.
Inflation in India remains much lower than in many developing countries.
But prices are rising more than twice as fast as in China, India’s
archrival for foreign investment and economic leadership among emerging
markets. Prices are also increasing considerably faster than in industrialized
That has put the onus on government leaders to try steering the economy,
which is expected to expand by as much as 10 percent this year, away
from a possible escalation of inflation pressures that could derail
some of their achievements and temper the country’s climb in living
“There is a recognition of these pressures and there is virtual unanimity
that these have to be managed,” Y. Venugopal Reddy, the governor of
the central bank, said in an interview this week. On Jan. 31, the
central bank raised an important short-term interest rate by a quarter-point,
to 7.5 percent, to help stem inflation.
Mr. Singh, Mr. Reddy and other senior officials have repeatedly reaffirmed
their commitment in recent days to the market-oriented policies that
have helped to triple the economy’s growth rate since the early 1990s.
But rising prices are starting to rekindle some nostalgia for the
1980s, when India had one of the world’s most highly regulated economies.
“You have to ensure some amount of price regulation,” said Suhel Seth,
a prominent political commentator and marketing consultant. “Under
the guise of a free market, you’ve created a free fall for the poor.”
Some of the largest increases in food prices have been here in Mumbai.
This is an industrialized peninsula where food is brought in over
long distances by truckers who have had to pay much more for diesel
fuel over the last year as the Indian government has passed on part
of the increase in world oil prices.
Navalben Nagda, a retired shopkeeper in northern Mumbai, shopped for
milk this week in a green sari but complained that she and her husband
had been forced to change their purchasing habits.
“We buy lower-quality food now because that’s all we can afford,”
she said. “It doesn’t taste as good.”
Wholesale price inflation has accelerated to 6 percent from 4 percent
last spring. Consumer price indexes have risen nearly 7 percent in
urban areas over the last year and almost 9 percent in rural areas,
where more than two-thirds of the population live and where higher
food prices are having the biggest effect.
Government economists attribute rising food prices in India to global
factors like a poor harvest in Australia, the growing use of crops
to produce ethanol and a higher cost of diesel for tractors. But many
here link the increase to the government’s encouragement of futures
trading in agricultural commodities, and the government has responded
this winter by limiting a few types of transactions involving food.
Mr. Reddy said he felt “some justifiable optimism” about inflation
and the Indian economy. He pointed to the lagged effects of interest
rate increases over the last year that had not yet fully worked their
way through the economy. He also noted that Indian companies were
investing in additional capacity and that new roads, loading docks
and other infrastructure were being built.
Still, the central bank’s surveys show that practically all of India’s
manufacturers are operating at full capacity, as consumer demand has
risen first and companies have been slower to respond. Many factory
expansions and new factories will be ready in 18 months to two years,
Mr. Reddy said, describing the time until then as a transitional period
for the economy.
Awash with deposits derived from foreign investors, Indian banks have
been lending aggressively, particularly to consumers. That has led
to a wave of buying on credit.
Rahim K. Premji, the manager of Allibhai Premji Tyrewalla, a motorcycle
store here, said that there had been so many buyers nationwide that
for the last six months, motorcycle factories had typically been 15
days late in filling orders.
“It used to be you’d place your order and they’d dispatch it right
away,” he said. “They’ve constantly been expanding capacity, but not
as fast as demand.”
The panoramic view from the 25th floor of India’s central bank provides
clear evidence of supply shortages. Across a wide swath of four-story
buildings, stretching for many miles, not a single construction crane
was in sight, not in the nearby historical district nor in the poor
and rich neighborhoods alike all the way to the edge of the warm waters
of the Indian Ocean.
That stands in stark contrast to Chinese cities like Beijing, Shanghai
and Yantai, which have used rising property markets to help finance
the bulldozing of many square miles of crumbling housing.
But India has very strong rent control laws and other tenant protection
legislation. Along with extensive litigation and backlogged courts,
these rules have made it extremely difficult to demolish and put in
high-rise complexes to replace the tens of thousands of acres of moldering
buildings that clog large cities.
The scarcity has sent prices even higher for existing housing. In
fashionable neighborhoods of South Mumbai, apartment prices have jumped
close to 60 percent just since last spring. Foreign investors, including
oil-rich investors from nearby Middle East countries, are joining
the market, bidding aggressively against members of India’s increasingly
affluent business elite.
Rushabh S. Mehta, a partner at the Royal House Agency, walked through
a 2,000-square-foot apartment that had a cheap-looking concrete floor
and flimsy wooden closets. But it is in the chic Malabar Hill neighborhood.
The asking price is nearly $1.5 million.
“It’s the location, basically — there’s no view,” he said, looking
out a window at the white wall of a neighboring apartment building.
Demand for everything from housing to beer is outpacing supply in
part because white-collar salaries are rising faster in India than
anywhere else in Asia, climbing 13.7 percent on average over the last
year, said Sharad Vishvanath, a labor cost analyst at Hewitt Associates.
Wages for junior managers and technical employees are rising fastest
of all. Meanwhile, new factories and offices take time to build. But
analysts and executives say that productivity gains could allow India
to wring more output from the businesses it already has, helping avoid
the bottlenecks that can feed an inflationary spiral.
Big gains could come from modern telecommunications and the growing
flexibility of India’s labor force, as shown by workers like Selvi
Partipan in Chennai.
Ms. Partipan, a 40-year-old who gave birth to the first of her five
children when she was 13, used to work as a street vendor. She fried
samosas and other fare for passers-by, earning just $2 a day.
But six years ago, after partial deregulation of the leather industry,
Mrs. Partipan found a leather factory job. She sewed everything from
handbags to jackets and earned $3 a day. She learned that she could
earn as much as an additional $7 a day by doing extra sewing at home
in the evening and on weekends, when other factories were desperate
to finish orders.
The difficulty lay in figuring out when a leather factory manager
somewhere else needed workers. So last summer, she gave $80 to her
son, a security guard who works a morning shift, to buy a mobile phone.
When work became available, factories sent text messages to her son
and others in English — Mrs. Partipan speaks only a local dialect
— and he quickly told her and she raced to the factory gate.
“I’ve already gathered some orders by phone,” she said, wearing a
maroon sari and sitting on a plastic stool as a daughter cooked samosas
at the same location where Mrs. Partipan used to cook. “It is paying
But while such adaptability helps to explain the long-term optimism
of most government and business leaders in India, people in the streets
are more worried about the continuing rise in prices. Mukesh Maru,
a shopkeeper in Mumbai, pointed to a steel basin of moong dal, a popular
type of small yellow bean in especially short supply now, and said
that the price had risen to 58 cents a pound from 23 cents a year
In the 35 years his family’s shop has been in business, he said, “it’s
only in the past year the prices have jumped so much.”
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