Indian Economy Overheating

Yesterday, 11th April, 2011 IMF came up with a report, stating emerging economies, particularly Brazil, India, China and sub-Saharan African countries are overheating.

On January 23rd, I posted in my blog about the Indian economy overheating due constant inflation from two years or so.

On 26th January mint published an article on similar topic of overheating of Indian economy due to Inflation pressure.

Today, 12th April 2011, mint has a front page article stating "IMF signals overheating of economy"

See the comparison...

Excerpts from yesterday's IMF report...

The global economic recovery is gaining strength, with world growth projected at about 4½ percent in both 2011 and 2012, but unemployment remains high, and risks of overheating are building in emerging market economies, the IMF said in its latest forecast.

“Fears have turned to commodity prices,” said Olivier Blanchard, Chief Economist at the IMF. “Commodity prices have increased more than expected, reflecting a combination of strong demand growth and a number of supply shocks. These increases conjure the specter of 1970s-style stagflation, but they appear unlikely to derail the recovery,” he told a press conference in Washington.

In many emerging market economies, demand is robust and overheating is a growing policy concern. Developing economies, particularly in sub-Saharan Africa, have also resumed fast and sustainable growth. But the IMF said new risks have emerged.

Rising food and commodity prices pose a threat to poor households, adding to social and economic tensions, notably in the Middle East and North Africa.

The challenge for many emerging and some developing economies is to ensure that present boom-like conditions do not develop into overheating over the coming year. Inflation pressure is likely to build further as growing production comes up against capacity constraints, with large food and energy price increases raising pressure for higher wages.

For full statement click here.

Excerpts from Today's mint headlines...

The International Monetary Fund (IMF) cautioned on Monday that emerging markets such as India are exhibiting signs of overheating, which if not immediately addressed could result in a sharp reversal in the growth momentum.

Overheating of the economy happens when the productive capacity is not able to keep pace with aggregate demand. IMF is, therefore, regardless of the impact on economic growth, making a case for steeper rate hikes by central banks to contain demand and thereby curb inflationary pressures.

HDFC Bank chief economist Abheek Barua said there are “severe signs of overheating” in the economy. “We need to move to permanent slower growth for some time,” he said.

“Signs of overheating are starting to materialize in a number of economies. Continued high growth has meant that some economies in the region are now operating at or above potential. Credit growth is accelerating in some economies (Hong Kong, India, Indonesia), and it remains high in China,” IMF said.

For full mint article, click here.

Excerpts from my 23rd January post...

Many people might be wondering why I am talking about overheating of an economy in the midst of recovery from present financial crisis. Particularly many people may not agree with the Indian Economy overheating concept that too when November IIP numbers are below 3% (2.7% to be exact), Stock market corrected almost 10% in last two months compared to its peers which gained 5%-10% at the same time and etc..

But if you see the inflation number what India is facing from last two years is above RBI's comfort zone of 5% to 6%. For the year 2009 Indian Consumer Price Index was of 8.3% averaged and where as 2010 CPI was 10.9%. Where as from 2003 to 2008 Indian consumer price index moved between 3% to 6% on average basis. So in these last two years Indian inflation went up by 4% points in the consumer price index level. In this inflation CPI or WPI, food inflation has been major contributor towards the both indexes.

I feel India is facing wage inflation, it is condition where in higher wages or increased wages chase little goods available in the market and causing increase in the prices of the goods and in turn putting pressure on wages to hike. Its like a spiraling or vicious circle.

For full blog post, click here.

Excerpts from 26th January mint article...

With high-inflation expectations and an unceasing march of prices, India is close to a wage-price spiral.

Since the new year began, the Indian stock market has fallen 8% below its December peak of 20,509 points. Long bond yields have risen by more than 20 basis points, touching 8.2%. Foreign investors have reduced their weights on Indian investments and capital inflows have turned into a trickle.

There are other reasons, too, for further monetary action. While 36% (3.1 percentage points) of the 8.4% year-on-year rise in the Wholesale Price Index (WPI) in December resulted from food prices, manufacturing inflation accounted for 34% (2.9 percentage points). The persistence in food price inflation, however—a 13.5% increase over December 2009—is now prompting doubters to suspect that strong demand factors could be at play.

Unsurprisingly, inflation expectations look set to be entrenched at higher levels, only a step short of triggering a price-wage spiral.

For article, click here.