India: feeling like a trillion dollars

India recently became the 12th country in the world to have an economy worth a trillion dollars. If the growth figures are the sunny side of the economy, the rise of the rupee is the darkening edge, says Pramit Pal Chaudhuri, a Bernard Schwartz Fellow at the Asia Society and Foreign Editor of the Hindustan Times, New Delhi.

Unfortunately for India, it has the look of a near-textbook example of an economy trading growth against inflation, says Chaudhuri:

The consumer price index touched eight per cent in March, a politically unpalatable figure in a country with as many poor people as India.

The Reserve Bank of India, the country's central bank, recently responded by hiking interest rates in an effort to temper consumption, and allowed the rupee to appreciate.

The rupee has now risen over 13 per cent against the dollar since last summer; since the beginning of March this year it has been the fastest appreciating Asian currency.

This may be helping ease rising consumer prices at home, but it is coming at a cost, including a slump in exports as Indian goods are priced out of the international market, says Chaudhuri. Further, there is now general consensus that if the Indian economy attempts to grow beyond 8.5 per cent a year, it runs a high risk of contracting inflationary flu.

But being a trillion-dollar economy does mean that a country has the resources to try and upgrade its economic motors, says Chaudhuri:

The Indian government says it has already lined up $350 billion for infrastructure investment for the next five years.

Private investors are prepared to jump in with more, once they see the new policies withstand the test of implementation.

Overall investment rose to nearly 34 per cent of gross domestic product last year – a sign that the country is building the capacity for higher rates of non-inflationary growth.

Source: Pramit Pal Chaudhuri, Feeling Like a Trillion Dollars, Washington Post, May 4, 2007.

For text: http://www.washingtonpost.com/wp-dyn/content/article/2007/05/03/AR2007050301599.html

For more on International Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=26

FMF Policy Bulletin/ 08 May 2007