The Indian Economy Blog

October 14, 2006

Trend Growth In India

Filed under: Banking,Business,Fiscal policy,Growth,Monetary policy — Edward @ 10:17 am

Prashant wrote to me earlier this week to bring a recent blog post (and Business Standard article) from Ajay Shah to my attention. Essentially Ajay is arguing the following:

“a lot of what is going on is owing to procyclical (i.e. destabilising) macro policy. I emphasise the distinction between the long-term trend and the business cycle. What we have seen for three years is the high of the business cycle, exacerbated by poor policies, and should not be mistaken for an acceleration of Indian trend GDP growth.”

Now Prashant knew that this would be of interest to me since I have been taking a rather different line vis-a-vis the long term trend in Indian growth (see, for example, this post).

My worries about what Ajay is saying are on two counts:

i) Firstly we have no precise and reasonable measure of just what trend growth in India actually is at this point, and there is a real problem if people start making estimates simply on whether or not they like the political flavour of the current government. It is clear to me at least that the trend is accelerating, but how far and how fast? In the background there is a lot of talk of the ‘demographic dividend’ but much of this has a ‘turn your nose up at the thought’ kind of feel about it. The demographic dividend is a real phenomenon, it will raise trend growth in India, and the only outstanding issue is whether or not we have in fact reached the full take-off point yet.

ii) Ajay says that India has “been helped by powerful world GDP growth.” I would say that this is rather putting the cart before the horse: powerful global growth has been helped by very strong autonomous growth in India, China, Brazil, Turkey etc. Indeed what we need is more detailed study of the growth process in the currently developing countries.

The German and Japanese economies are definitely driven by a combination of strong developing world growth and a healthy consumer appetite in the US, as, to some extent is China. Now that the US is slowing somewhat it will be important to watch what happens in China. At present there is no sign of a loss of momentum in the Chinese economy. If this continues, and if India continues to show high GDP growth, and if the emerging markets generally stabilise after the initial weakening of confidence and outflow of funds, then the US might avoid recession in 2007, since Germany and Japan would be given another push and markets would be more vibrant, and this already reasonably long boom would then go on at least a little longer. This is how I would put the state of play in the global economy. And here India may well play an important role, since up to now the Indian and the global economies have not been that tightly interlocked, and that may be about to change.

Well, these are my feelings. But I am not in India, and I am not an Indian economy specialist, so I thought I’d take some more opinions. I mailed regular IEB commenters Nandan, Aninda, and Venkat to see what their take on Ajay’s arguments was. The results are below in the comments section, and very interesting reading they make. Anyone else who wants to chip in with something, please go ahead.

Update

Possibly it is worth pointing out that Chetan Ahya and Mihir Sheth have a two part post about Fiscal Policy in India on the Morgan Stanley forum this week (and here), while Andy Mukherjee has himself taken up the trend growth topic here. I will try and say something about these in the comments section.

11 Comments »

  1. Here’s some thoughts about:

    1) Procyclicality in India’s growth (destabilizing path?), and
    2) Powerful world GDP growth as a driver in India’s growth.

    I think we all agree that the secular backdrop of India’s emerging economic story is an increasingly demographically driven opportunity, with: a growing workforce, rising literacy rates, more savings and falling dependency ratios. Of course, we can always quibble about whether such demographic aggregates are conceptually sound and temporally realizable. But by and large, and assuming Indian industry starts hiring in a much bigger way (which, BTW, they haven’t done so far), such demographic dividends could very well become a self fulfilling, and a reinforcing, cycle. At this point, however, the demographic dividend is still merely an “opportunity” but not yet a “chance” to lock in permanently higher (& stable/balanced) growth rates.

    I have already articulated the reasons for my hesitation in earlier blogs. They are related to: 1) the relatively job-less growth in Indian industry; 2) Higher birth-rates in rural areas; 3) differential in educational attainments (rural versus urban). In future emails/posts, I will explain my position(s), in further detail on the intractable policy and political challenges they pose.

    So given the demographic opportunity (but not yet its certainty), in my view, India’s policy makers have probably squeezed out an extra percentage point or two of economic growth by relatively lax fiscal and monetary policies. From a quantitative standpoint, fiscal policy meets several, though perhaps not every, criteria for “pro-cyclicality”.

    First, lets deal with the fiscal aspects of policy pro-cyclicality. Going by newspaper reports of the past several weeks, the central gov’t has projected a deficit of 3.8% of GDP in fiscal 2006-07, down from 4.2% in fiscal ’05-’06. However, spending in the first 5 months, quite worryingly, was more than 60% of total projected in the fiscal year. Nominally offsetting this concern is that, in the same time period, revenue growth was nearly +30% versus expectations of +17% (nearly 1.8Xtimes). All of this does not, however, include the oil price subsidies that are being cut back gradually, but whose net costs to the exchequer are widely believed to be around 1% to 1.5% of GDP. And these are regarded as “off-budget” items that are being financed by the state-owned oil companies. So, I would argue that the fiscal position may appear to be strong if all goes well and the central gov’t is indeed able to meet its 3.8% of GDP deficit target even after blowing its spending guidelines. However, the overall fiscal framework (and discipline) is still weak and susceptible to sudden revenue shocks to which spending adjustments may not always be forthcoming.

    Turning to monetary aspects, the RBI has hiked rates (the reverse repo rate) by 125 bps since early 2005. Even after allowing 6 months to year’s lag for its full impact to come into play, it turns out that both the annualized rate of growth of the economy and inflation (at respectively, 8.5% and nearly 6%) are higher today than at the beginning of the modest tightening cycle. A cycle, that, incidentally, may be nearing its (premature?) end. From the view-point of inflation fundamentals, given that recent price pressures are due mostly to oil prices, and narrowing output gaps, though considerably offset by an ever growing inflow of cheaper imports, the RBI could have gone in for a sterner rate normalization that would have: a) been more effective at reining in headline prices; and, b) dissuaded a credit bubble in real-estate and stock markets that have been fueled by cheap bank credit and huge amounts of NRI investments and leverage.

    So, are we running on a “policy de-stabilizing” path as Ajay Shah mentions? In a classic closed economy model of structural policy analysis, probably yes. But India is rapidly opening up to trade and investment. Imports of cheaper goods is holding back the full force of oil-shocks & narrower output gaps without leading to unmanageable external imbalances. So while this structural shift on the external front, along with the demographic opportunities, allows for at least some policy slippage, I would still argue that economic policy laxity, if not outright pro-cyclicality, represents a forgone opportunity to deepen/anchor future policy maneuvering room in the event of unforeseen shocks. But, contrary to Ajay’s contention, [looser economic policies] have not necessarily led to the seeds of an outright lowering of trend growth in coming months.

    On the point about slowing global GDP growth representing diminishing external “tailwinds” that India could benefit from, I would argue that this is indeed the case. Edward, you are not incorrect –per se- in pointing out that emerging markets are increasingly contributing to overall global growth. But, in the specific context of India, what we are faced with is an economy that is increasingly opening up and starting to view trade in goods, and especially services, as a way to grow faster. So with exports of goods and services at 20% of GDP and rising, and with US, UK & EU accounting for just over one-quarter of India’s exports (or 5% of India’s total output), you can be rest assured that the external demand channels for India will cool if these economies slow. A better way to put this is, if the main economies of the world slow, nominal $ world trade will slow; even if PPP adjusted GDP growth in EMs is still strong. Leaving aside terms of trade consideration for the moment, such a slowdown in world trade will come at a bad time for India and several other EMs just as they are becoming more open to trade. I will add, however, that India’s prospects could have a interstingly positive twist. Depending on the nature/extent of the U.S.’ soft/hard landing in 2007, the corporate spending & investment restraints that would arise onshore could lead to a new wave of new offshoring of more white-collar work to India. Whether, from India’s perspective, this will offset a wider goods export slowdown, or not, still needs to determined.

    Aninda.

    Comment by Aninda — October 14, 2006 @ 10:21 am

  2. In his article, Ajay Shah pegs the procyclical component of Indian GDP growth at 2% (“The 12 quarters of 8.5% growth reflect a combination of trend growth at 6.5% with an extra two percentage points owing to favourable business cycle conditions.”), which is reasonable for a skeptic. This would of course imply (using crude metrics) that GDP growth was ‘borrowed from the future’ and that we will see 12 quarters of 4.5% growth once the fiscal/monetary stimulus is withdrawn.

    For this purpose, we can break down GDP growth into the standard neoclassical growth components where ‘trend’ GDP growth (the max rate which does not cause inflation) equals:

    Capital Deepening (growth from increased investment)

    + Growth of Labor force (‘demographic dividend’)

    + Total factor productivity growth (the structural component which captures growth from market reforms, technological change, etc.)

    The difference between this trend rate and the actual rate is what Ajay describes as the “pro-cyclical” component, and he implies that there is also an international component (though it’s unclear whether this is part of cyclical component or independent). His conclusion that this implies a necessary slowdown, however, relies on several other assumptions which he fails to substantiate. I’ll discuss three of the big ones.

    1. He assumes stable (and not accelerating) overall productivity growth. Productivity growth, in particular the TFPG component, has been steadily accelerating since 1990, as he himself notes. My view is that this is combination of substantial structural change (whether reform induced or not), technological uptake, product and financial market reforms, increased competition from inward FDI/trade, and the coming ‘online’ of previously informal parts of the economy. Now, my point isn’t to imply a relentlessly increasing rate of productivity growth by virtue of these factors–but rather to point out that our long-term rate (or ‘trend’ rate) is nowhere close to stabilizing at a fixed level yet. That’s why his 6.5% base rate, which he uses to calculate the 2% cyclical component, is a weak starting point.

    His quoting of the IMF’s forecasts only covers up the fact that he is essentially making a political judgment – that reforms will stall along with productivity growth. While I think there might be good reason to be disappointed with the current administration’s lack of clear progress here, my belief is that a substantial part of the structural change that’s driving growth is indigenous (ie. not directly reform-induced). Companies getting their balance sheets in order, small and medium companies finally accessing finance to expand, and an influx of entrepreneurial and managerial know-how and talent are all slow processes that are now gathering steam and still have a long way to go before they bear full fruit. This isn’t a clean and simple process, but it is likely to be a significant contributor to GDP growth for some time to come.

    2. He’s right in that inflation has accelerated to 6+% in June 2006, and this is reason to worry. However, over the past three years, inflation has been relatively stable and decently-contained within the 3-5% range despite the high GDP growth. So even if we’re in a procyclical stage, we’re only at its very beginning–not three years in, as he seems to suggest. Furthermore, he assumes that all the inflation is the result of unsustainable levels of domestic economic activity. Surely, the surge in energy prices in the first half of the year (which have significantly subsided in the last 3 months) is partly responsible for this. While high energy prices reflect a lot of other unsavoury international facts, they are certainly not evidence of unsustainable levels of demand in India.

    3. He warns that a weak international environment will be very bad for India. However, exports account for only 20% of GDP in India (compared to ~40% in China and Germany). While weak international demand will certainly affect us, its net impact on growth isn’t going to be nearly as big as in other large economies. Furthermore, because India is also a large driver of world GDP growth (as Edward noted), the impact of a US/EU/Japan slowdown on world growth is likely to be more muted than it used to be. By my calculation, the BRIC countries have been responsible for about a quarter of world real GDP growth over the last five years (this is at market exchange rates; if you calculate by purchasing power, you can probably increase that number by another 10-15%). The US’ share of growth has been declining since about 1998 – and using the EIU’s GDP forecast, will be less than the BRICs’ share before the end of the decade. In fact the IMF publication he cites has pegged world growth at 4.9% in 2007 despite the forecast slowdown in the developed economies (it forecasts India’s growth next year at 7.5%).

    Now I’m not trying to say that I completely disagree with him and that everything will be hunky-dory for the Indian economy over the next couple of years. He’s completely right in that we are likely to face some cyclical pressures both domestically and internationally. He is also right in pointing out that a lack of appropriate discipline in fiscal and monetary policy could lead to bad things like the crowding out of private investment and unhealthy inflation (I give our monetary authorities more credit). However, the suggestion that rapid growth of the last three years has been an temporary aberration caused by this unsustainable stimulus is completely false.

    I’m not pretending to know better than him what will happen to growth over the next three years. I am simply trying to point out the fundamentally flawed logic of his forecast.

    Comment by Nandan Desai — October 14, 2006 @ 10:23 am

  3. This was Aninda’s comment:

    “Even after allowing 6 months to year’s lag for its full impact to come into
    play, it turns out that both the annualized rate of growth of the economy
    and inflation (at respectively, 8.5% and nearly 6%) are higher today than at
    the beginning of the modest tightening cycle. A cycle, that, incidentally,
    may be nearing its (premature?) end.”

    - The interest cycle in India seems to be driven by the RBI’s perception of a liquidity gap. The Credit:Deposit ratio’s of some banks was over 100%. I am now seeing banks, which earlier used to hold Govt Securities close to 40% of their deposit base, are now close to 25% (the minimum by current regulations); due to the runaway credit growth. This growth has come from retail and corporates. The corporates have begun their investment cycle, their balance sheets and earnings outlooks are stronger than the 1998 levels. Retail debt levels has been historically low, as the banks never looked at the segment for deployment. In this terms the health of the borrowers is sound, but the banks are not good enough at attracting deposits, as the rates being offered at 6% levels was too low (in comparision to government savings schemes of 8%, and the equity/ property market returns of +25%). Hence the banks had no choice but to increase interest rates – deposit side and credit side. This fitted inwith the global liquidity tightening cycle, but I dont think was in any way influenced by global investors, as they dont operate really in the indian banking scene.

    the other big factor is the government borrowings, which given the robust tax collection scenes, it still hasnot impinged on having to offer higher rates to get the bonds subscribed. In other words the interest rate tightening is got more to do with the banking sectors ability to raise deposits. They are some of the biggest borrowers from overseas investors today, and with Basle -II norms to be implemented in March 2007, they need more Capital Adequacy for this and the runaway credit growth. Hence we may not see a rate hike immediately, but a deferral of the timeframe for Basle -II implementation

    Will this impinge on the GDP growth rate ? Borrowing costs are not material in sectors other than – finance, textiles, and maybe certain capital intensive sectors like roads/ infrastructure. These sectors will face increasing costs, some have the option to pass it on. Textiles/ infrastructure I dont think have these options, has will face shrinking margins. Other than a few like these, interest rate hikes at the margin, dont impact their functioning. Maybe if the interest rates go to say 12%, from the current 10%, will the hurdle rates for new investments be reviewed. Till then the macro is too robust for people to change their minds. If the politics can be managed, then the RBI governor would like to increase interest rates so that the banking sector can better attract savings/ deposit

    Hence you have the interest rate hikes having a limited impact on slowing down the economy

    This was Edwards comments
    Clearly inflation in India needs to come down, but this may be
    achieved better by having a substantial reform process (and especially
    labour maket reforms) rather than by simply using monetary policy. In
    the absence of reform monetary policy may be an inevitable recourse,
    but we should be clear that this is a non-optimal approach, and
    essentially because of a failure elsewhere

    - Yes imo, inflation needs to come down. The costs seem to more domestic oriented, rather imported. Crude – is heavily taxed/ subsidised/ delayed in being transmitted to indian consumers. And now given the merchant refining capacity built-up refined products are exported in a significant manner as well (almost 8% of Indian export of goods is refined products). hence global energy prices impact but in a muted and delayed manner. A large component of the imports is export oriented (gems& diamonds, steel for engineering exports) or investment oriented (capital goods or gold for personal saving/ consumption). Hence a smaller fraction of the imports is for domestic consumption, eg. copper/ aluminium, which leads to inflation. In other words Indian inflation is largely domestic generated eg. Cement, Services. Food prices are driven by factors like floods/ shortages due to greater than expected demand in the current season. I believe the impact of imports on inflation is modest.

    Services costs are all going up – as salaries/ real estate/ investments to provide the service are goingup in almost all kinds of services. eg. Education, Health, Housing, Transportation. I feel that there is very limited competition in services, due to regulations or .., hence the demand-supply factors dont really come into play. The aspect of most of the development being in Indian urban centers, has also got to do with this this. Hence if our urban planning can be done better, to disperse the supply-demand, than this would also go significantly towards reducing the inflationary pressures.

    The rigidity of the labor laws, has some role, but Indian companies who have passed the initial mortality period (say 3 years since inception) do learn how to comply with the laws and yet keep their capabilities/ capacities flexible. However what has not happened is how do you create new skills/ new jobs eg: as I said in earlier posts in sectors like construction, health, urban services, hospitality. This requires the Government to be a better employer/ regulator/ enforcer of standards (eg. no child labor in construction/ hospitality, but at the same time provide employment to the childs parents so that the primary reason why he is in the market is addressed, as it is because the employer does not even pay the minimum wages which are prescribed in many cases !) Government if it enforces a uniform implementation, not the patchy effort we see in many cases today, then the market also participates in the same. Then we have job creation, as well as improvement of human capital, with the government in the role it is best designed for. However I dont know if our current administration/ politicians are suited to addressing these kind of solutions to take a societal view, and not a partisan/ self-centered view !. I do believe urban decongestion, not by fiat, but by improving infrastructure and urban services elsewhere would also do the trick in creating employment, and hence better competition and hence better ways of dealing with inflation

    Monetary policy takes a long time to transmit in India, because of the limited spread of the banking system, as well as the disparities in the various states, urban/ rural, as an allocater of savings/ loans to the household & corporate sectors. Today it can clearly influence the cost of government borrowing definitely, and that too quite rapidly, but will this change how the government thinks of fiscal discipline? I think, it would need another generation of reforms to establish the independance of the regulator and the importance for fiscal discipline by the governments too !

    Comment by Envenkat — October 14, 2006 @ 11:31 pm

  4. Looking through Chetan Ayha and Mihit Sheh, as well as the points Aninda makes on the fiscal side, I think it is important to separate two questions:

    i) Is fiscal policy in India in severe disorder?
    ii) Is fiscal indiscipline really a major explanation for the surge in Indian growth?

    It seems to me to be quite possible to argue yes to (i) and no to (ii), while Ajay Shah would seem to want to argue yes to both (i) and (ii).

    I far prefer Aninda’s formulation:

    “economic policy laxity, if not outright pro-cyclicality, represents a forgone opportunity to deepen/anchor future policy maneuvering room in the event of unforeseen shocks.”

    Clearly there seems little justification for having such a strongly pro-cyclical fiscal situation, and Chetan Ayha and Mihit Sheh points about the structural problems in finance, and in particular seem to make a significant point about the growing influence of regional parties and their impact on development spending.

    “Over the last 15 years of reforms, the declining share (in terms of seats in the lower house of the parliament) for the single largest political party (due to the emergence of smaller regional parties) has been reflected in the fall in development expenditure. Although the share of development expenditure has been largely steady in the last five years, it remains significantly lower than average levels in the 1980s and 1990s. While national government development expenditure is estimated to decline to 14.8% in F2007 from 17% in F1991, non-development expenditure rose to 12.5% of GDP in F2006 from 11.2% in F1991. The major areas where non-development expenditure has risen are interest costs, explicit subsidies and pension expenses.”

    Obviously the room for expansionary counter-cyclical fiscal policy is virtually nil should the economy turn down significantly, but the big unknown is whether in fact India is about to slow as much as some think. I have serious doubts about this, largely for the reasons Nandan is articulating.

    Comment by Edward — October 14, 2006 @ 11:34 pm

  5. I think Venkat is making some very important points here. The Indian banking system really is, and needs to be, in transition. Basle II may well serve as an impetus to carry this through.

    As Venkat says:

    “Monetary policy takes a long time to transmit in India”

    This is called the monetary transmission mechanism, and its pace of operation varies significantly from one country to another. Perhaps the country where things adjust most rapidly (as we are now seeing) is the US. The eurozone transmission mechanism is very different from the US one and so on.

    This is important because of the widespread use of the standard monetary equation:

    MV = PQ
    (Money, Velocity, Price Level, Quantity).

    The simplistic versions of monetarism (inflation is always and everywhere a monetary phenomenon) tend to downplay changes in V, but these are often much more important than people imagine (Japanese deflation being the most recent and notorious case).

    Hence:

    “I am now seeing banks, which earlier used to hold Govt Securities close to 40% of their deposit base, are now close to 25% (the minimum by current regulations); due to the runaway credit growth.”

    One large factor in credit expanisions or contractions is the ‘apppetite for risk’ in the banking sector, whether your bank manager is in a hurry to let you have a loan or not. Expectations of future developments play a key role here, and these normally tend to operate in a non-linear fashion, ie you get cycles of win-win upwind, followed by cycles of lose-lose downwind.

    Obviously as the Indian economy reforms and the banking system becomes more efficient you can get an increasing volume of transactions out of one and the same monetary base. Whether this is inflationary or not depends on other factors like the supply constraints.

    “but the banks are not good enough at attracting deposits, as the rates being offered at 6% levels was too low (in comparision to government savings schemes of 8%, and the equity/ property market returns of +25%).”

    This is another very important point. In this sense the government borrowing requirement could be thought to be ‘crowding out’ private sector investment by making borrowing more expensive. This is an argument often run in the US these days, where it hardly seems expecially relevant at the present time.

    Obviously both bank deposits and government revenue could be increased relatively rapidly with the high level of economic growth if the mechanisms for incorporating people in the bank and tax system evolve rapidly enough.

    Mind you, while Reddy has been making three quarter point raises, 10 year bond yields seem to be trending down. Andy Mukherjee.

    The yield on the 10-year Indian government bond has fallen three quarters of a percentage point after touching an almost five-year high of 8.4 percent on July 12. At least one investment bank, Credit Suisse Group, is predicting that yields will continue to decline for a year to 18 months without any letup in economic growth.“Bond Yields Down, Growth Solid,” was the title of Credit Suisse economist Sailesh Jha’s note to investors last week.

    On the other hand India is not getting the ‘hot money’ element which China has on speculation about renminbi revaluation, nor does India (yet) have the inflows which China gets from a balance of payments surplus.

    So as Venkat says the funds need to be raised locally. The other big possibility is to attract external funding in private sector lead infrastructure projects (especially since given the fiscal position, the government is going to be hard pushed to lead this). We will return to this topic in a post next week.

    “Indian inflation is largely domestic generated eg. Cement, Services. Food prices are driven by factors like floods/ shortages due to greater than expected demand in the current season. I believe the impact of imports on inflation is modest.”

    Thanks Venkat, this is now much clearer as far as I am concerned.

    Comment by Edward — October 15, 2006 @ 1:10 pm

  6. Just one last quick point on the demographic divident issue. Andy Mukherjee makes a point you hear quite often.

    “Can the Indian economy go on expanding 8 percent annually year after year without producing too much inflation? Such a period may indeed arrive, just like it did in East Asian nations, including China, because of a “demographic dividend” — an increase in the proportion of working population, pulling up the national savings and investment rates.But that point, where a developing economy moves into a higher ratchet and stays there for years or even decades, may not be here yet for India.”

    This is a complex issue and a complex situation. In order to address it we need to start to look at some of the details of Indian demographics, and of growth rates. It may be that the dividend is being experienced at different rates in different parts of India
    and that the way to handle this is with capital and labour flows.

    Some of the states in the south have undoubtedly already passed through a large part of the transition (ie they already have below replacement fertility and are ageing) while others – mainly in the North – have barely commenced. So using aggregates here hides a lot.

    Take Kerala, which is now ageing before getting rich. This must be part of the reason for some of the regional pensions pressure. In some ways Kerala is similar to Hungary in the EU, there is catch up growth, but not sufficient to offset the ageing component. Kerala needs to change models and attract investment – and then attract migrants.

    There is a lot in the details here, and it all needs thinking about.

    Comment by Edward — October 15, 2006 @ 1:19 pm

  7. A further update on the composition of imports, based on a report which appeared in Economic Times of 16th October. The imports in FY2005-06 were broken up as

    Crude = 34%, Export Related inputs= 13%, Capital Goods = 15%, Gold = 7%, Other inputs (for consumption) = 32%. Or import based inflation can be atbest on 32% of the goods, which given the wide nature of imports, commodities (copper, aluminium, steel, etc) would be a small portion

    On Merchandise exports, Petroleum exports are now 11% of the total, indicating the level of merchant-refining capacity builtup (primarily Reliance Industries, Mangalore Refineries and Essar Oil today. The refining margins earned also to some extent cushion the impact of rising crude, to the economy as a whole, if not to the customer directly

    Comment by envenkat — October 16, 2006 @ 8:35 am

  8. On October 12th Andy M said this:

    “And yet, most traders and analysts don’t expect the central bank to raise interest rates when it announces monetary policy for the next three months on Oct. 31.”

    On October 13th Venkat said:

    “If the politics can be managed, then the RBI governor would like to increase interest rates so that the banking sector can better attract savings/ deposit”

    And today (16 October)the bond markets seem to be listening to Venkat :)

    Bloomberg:

    India’s bonds fell for a second day on speculation the central bank on Oct. 31 will raise interest rates for the fourth time this year to temper inflation after prices accelerated at the fastest pace in three months. An auction by the government on Oct. 13 of 10-year securities attracted less demand than expected by traders. The Reserve Bank of India may increase the benchmark rate this month, Business Standard newspaper reported today, citing unidentified bankers who attended a pre-policy meeting with central bank Governor Yaga Venugopal Reddy.“There’s a case for an increase in interest rates looking at the macro-economic data,” said Poonam Tandon, chief bond trader in Mumbai at Securities Trading Corp. of India, a primary dealer that underwrites government debt sales. “The demand is falling as cautiousness creeps in before the rate decision.”

    Keep your finger on the pulse Venkat :).

    Comment by Edward — October 16, 2006 @ 2:09 pm

  9. [...] Earlier in the week Naveen drew our attention to a recent article in the Economist, Too hot to handle: Why the sizzling Indian economy is more at risk than China’s?. Now the article is an interesting one, but it does revisit a theme which we have already discussed a number of times on this blog, namely just how high is trend growth in India? [...]

    Pingback by The Indian Economy Blog » Sizzling, Or Just Right? — November 29, 2006 @ 11:19 pm

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  11. [...] This is the rate at which an economy can (and should) grow without causing excess inflation. The current capacity debate (discussed here, here, and here), in essence, is about what this number is today. Ajay Shah, the Economist, and various investment banks (including Morgan Stanley and HSBC) have repeatedly said that India is overheated – evidenced most clearly by the run-up in inflation, and also by ‘bubble-like’ real estate and equity prices. Skittishness about the policy direction of the current governing coalition supports the prevaling belief that a crash (or, for the less brave, a “cooling down”) is imminent. According to them, economic growth and/or asset prices are both set to decrease in the near-medium term. [...]

    Pingback by The Indian Economy Blog » The Indian Productivity Miracle — December 19, 2006 @ 2:18 pm

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