India’s booming growth spurs inflation

By Rajesh Mahapatra NEW DELHI, AP

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 percent 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 percent to US$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 percent 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 percent on Feb. 17 and has since mostly stayed above 6 percent, but retail prices have risen as much as 10 percent 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 US$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. Exacerbating the central bank’s problem are the billions of dollars in foreign investment and remittances that have flowed into India in recent years, leaving banks flush with funds. In the past two years, bank loans have surged nearly 30 percent annually. Loans to commercial real estate grew as high as 80 percent last year. If asset prices crash, borrowers could begin to default on repayments, setting off a chain reaction that could plunge the banking system into a crisis. Some of the country’s largest banks have already started reviewing what could potentially turn into risky assets. “If you don’t worry now, then you will end up with a price bubble,” said Shankar Sharma, head of Mumbai-based brokerage firm First Global. “And when the bubble bursts, you will have a problem that will last for years.” Meanwhile, top officials no longer talk about accelerating economic growth, although until recently the government believed India’s growth rate could move close to China’s 10 percent rate. Announcing the latest rate increase on March 30, the central bank said its focus has shifted to “reinforcing price stability” from the previous stance balancing growth with moderate inflation. Last week, Moody’s Investors Services said India was showing “classic signs of an overheating economy,” and urged far-reaching reforms. “There is a desire to slow things down. The question is to what level,” said Saumitra Chaudhury, a member of the Indian prime minister’s economic advisory council. Most factories are operating at full capacity and ongoing investments would take 12 to 18 months to bring new capacity on stream to match rising demand from consumers, according to a recent RBI survey. India also needs to expedite investment in new infrastructure, as frequent power outages, potholed roads and clogged airports dent productivity and add to costs of manufacturers, analysts say. Until that happens and prices ease, the country should settle for a lower growth, they say. “Our sense is that a 7-8 percent growth is good for now,” said Sharma of First Global.