India's Economy May Overheat in 2010

In the third quarter of 2009, India's economy expanded 7.9%. And although it is expected that in the last three months of 2009, the third largest economy in Asia might have recorded growth over 8%, the beginning of 2010 may surprise us on the negative side. 
Anna Fedec, 1/21/2010 8:38:34 PM

Indeed, recent data is indicating that GDP growth in the last quarter of 2009 may beat expectations. For example, since June industrial production has been accelerating, recording 11.7% growth in November, the fastest in two years and exports grew 18% yoy in November. Yet, the stunning performance of the Indian economy has a lot to do with a significant fiscal stimulus and loose monetary policy. In fact, it is estimated that government contributed  around 50% of  total GDP growth in the year to September. In addition, lower interest rates have supported domestic demand for consumer durables.

However, despite some positive data, the rising inflation is a growing concern. Indeed, a weaker monsoon has pushed price of food significantly higher in the last few months. This price pressure combined with strong industrial production may soon lead to interest rate hikes and tighten credit availability. Also, there is another danger by the corner. It is likely that due to extensive spending, Indian government may record huge fiscal deficit in the year to March. And in order to balance the budget the authorities may decide to increase taxes thus crowding our private investments.