Price rise and high interest can doom the UPA party
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Home General

Price rise and high interest can doom the UPA party

Archive Manager by WEB DESK
Nov 12, 2006, 12:00 am IST
in General
Jeay Sindh Freedom Movement chairman Sohail Abro

Jeay Sindh Freedom Movement chairman Sohail Abro

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With the UPA Government going gung-ho about sustaining and even improving the GDP numbers to eight per cent, analysts are wondering ? is the Indian economy overheated?

To simplify and straighten out the economic jargon the term ?overheating? means excessive demand building on excessive credit leading at times to building of bubbles that could then burst to disasterous consequences. Typically in an overheated economy, inflation raises its head as essential commodities fall in short supply and more often than not the supply chain is distorted and manipulated by those who want to make a killing in an uptrend environment.

No single economic or business cycle can be sustained for long: If there is an excessive heat it has to give way to a sure consequence; which in economic parlance means landing ? that could be soft or hard.

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Initial signals are clear. The Indian economy cannot be handed over on a platter to the risky players in the credit market and the stock market. Financial markets tend to go irrational when you have a Finance Minister flaunting the plus eight per cent GDP growth every other month. The smile on Shri P Chidambaram'sface tells you as if he alone is responsible for the growth performance and the kind of feats he has achieved; no other FM ? future or past could have a claim.

Where are the danger signals? Inflation is getting out of control ? five to 5.5 per cent are the official figures. But ask a housewife and she would tell you how difficult it is to run her household expenses ? be it vegetables, fruits, wheat, rice, eggs and meat, milk, edible oil or sugar.

The Reserve Bank of India Governor Dr Y V Reddy, acknowledges the inflationary currents. ?Growth is high, there is demand pressure and one has to be watchful to see how they work out?, Dr Reddy said on October 31, immediately after unveiling the half-yearly review of the Monetary Policy for 2006-07.

An important signal about heating up of the economy is credit growth of over 30 per cent while the bank deposits are growing at below 20 per cent. People continue to borrow; not so much for investment but for consumption and speculative buying of real estate. In the last six years, the share of personal loans and construction in the total credit disbursement by banks has more than doubled giving sleepless nights to the Reserve Bank of India.

The central bank, in its policy stance, has clearly expressed concern over the households absorbing huge amount of credit growth. ?There seems to be some risks to sustainability of the recent rapid pace of growth in bank credit to households?, the monetary policy statement said. Housing loans have seen a rise of 54 per cent in the current year so far indicating towards building of a possible bubble.

Households are getting into a habit of excessive spending on debt-financed consumption which, bankers feel could turn out to be a real problem if refinancing options dry up. Though Dr Reddy has signaled an upward interest bias by increasing the Repo (rate at which RBI lends to banks), it is not enough to tame the inflation.

In 2003, during the NDA Government, the inflation ? measured more realistically through the Consumer Price Index (not WPI) had gone down to three per cent. Today, it is between six and seven per cent on CPI. Many commentators have started fixing RBI'sresponsibility as well. Thus, all the signs of an overheated economy are visible. We have inflation getting out of control and the credit growth is leading to profligacy while the Sensex ? driven analysts are partying.

Beware of the hard landing that could ground the national economy to its nose!

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