India's recovering economy

Despite a bad monsoon, India’s economy is motoring

MARUTI-SUZUKI, India’s leading carmaker, sold over 76,000 cars in November, 60% more than in the dire month of November 2008. This sharp recovery left your correspondent with mixed feelings. As the proud owner of a Swift, a popular model, he is finding it increasingly difficult to spot his silver hatchback in Delhi’s crowded car parks.
Car sales are one sign of life returning to the country’s shoppers. The economy grew by 7.9% in the year to the third quarter, far surpassing expectations. Private consumption expanded by 5.6%, having grown by just 1.6% in the previous quarter. Elsewhere, Asia’s rebound has relied on exports and investment, serving foreigners and the future. India’s economy caters more to the here and now.
It will struggle to grow as quickly in the rest of the year. India suffered its worst monsoon since 1972 this summer, with the rains falling 23% below their historical average. This dented agricultural output in the third quarter less than expected. But India will surely reap what it did not sow in this quarter’s figures.
The monsoon is already pushing up food prices, which have risen by 14% since March. Consumer prices, however they are measured, are more than 10% higher than a year ago. India is the only big economy where inflation is higher today than it was before the financial crisis. Insofar as the monsoon is to blame, India’s central bank may be willing to overlook rising prices. But if inflation is not kept in check, it can become embedded in people’s expectations. Indeed, one reason for the brisk car sales may be fears of an imminent price rise.
Tushar Poddar of Goldman Sachs expects India’s central bank to raise interest rates by up to 3 percentage points by the end of 2010. That is enough to make anyone contemplating a car loan think twice, as well as to concern India’s biggest borrower, the government.
Its fiscal deficit, including the state governments’, is likely to top 10% of GDP in the year to March. Forgivable during the crisis, this unbalanced budget threatens to crowd out private investment as the recovery takes hold. The gap partly reflects special outlays that will not soon be repeated. The government is spending about $17 billion to forgive the debts of small farmers, for example. It is also absorbing the cost of the Sixth Pay Commission, which meets every decade or so, to set the pay of the government’s legions of employees. The commission’s recommendations last year included big dollops of back pay, or arrears. This arrived in bureaucrats’ pay packets just in time to prop up spending during the downturn. In the last three months of 2008, for example, as the world economy reeled, public consumption grew by over 50%, compared with the previous year. Never have “arrears” proved so timely.