Inflation measures curb growth in India

NEW DELHI -- The central New Delhi car dealership of India's leading automaker, Maruti Suzuki India Ltd., looked busy enough. Many of the tables beside the company's shiny compact cars were occupied with dealers reeling in customers.

But T.R. Sawhney Motors Pvt. Ltd. CEO Rahul Sawhney said the hive of activity was misleading. Sales, he said, were significantly below forecasts.

"Rising interest rates are hurting consumer sentiment," he complained.

Auto sales, a key indicator of consumption trends among India's middle classes, began to suffer in April and year-on-year growth rates, which have been consistently above 20 percent, finally turned negative in July for the first time in 26 months.

A similar cool breeze is being felt across the Indian economy. According to figures released by the government of India on Aug. 30, personal consumption grew only 6.3 percent year on year in real terms in the April to June period, while growth in gross domestic product dropped for the third straight quarter to 7.7 percent year on year in real terms.

Inflation and tight money policies designed to fight it have been curbing growth in personal consumption and corporate investment in one of world's key emerging markets.

With commodity prices still rising globally, India's wholesale price index continues to rise at more than 9 percent year on year. Between March 2010 and late last month, India's central bank raised the key interest rate 11 times, damping investment and consumption.

With persistent talk of the United States further easing money supply to bolster its own economy, Toru Nishihama, senior economist at Dai-ichi Life Research Institute Inc., said: "It seems inevitable that global markets will remain flooded with cash over the long term. Inflationary risks will persist in emerging nations."

Another major factor affecting India's economy is the shadow that debt problems are casting over the economies of two of its major export customers, the United States and Europe.

However, Rob Subbaraman, chief economist at Nomura International (Hong Kong) Ltd., said: "The rising weight of domestic demand in India and other emerging Asian nations means that they are now less susceptible than before to economic slowdowns in the U.S. and Europe."

India's GDP grew 8.5 percent in fiscal 2010 (April 2010-March 2011) compared with the previous year, and the Prime Minister's Economic Advisory Council has projected 8.2 percent growth in fiscal 2011. However, estimates by some private think tanks are questioning that optimism, with at least one in the lower half of the 7-percent range. A slowdown appears inevitable. However, the majority view is that there will be no sharp drop similar to the one following the 2008 collapse of Lehman Brothers.