India’s economy continues to impress. It has been largely unaffected by the global economic crisis, due to its relatively ‘closed’ nature. This gives its central bank a more traditional role – reducing interest rates when economic activity slows, and increasing them as it recovers.
Currently, it is on the latter course, increasing rates to 5.75% this week. Its problem, unlike much of the developed world, is rising inflation, which is now around 10%. Thus the Governor of the Reserve Bank, D Subbarao, has made it clear that “we expect credit to be dearer, as credit demand picks up, we expect lending and deposit rates to go up.”
The Bank also increased its GDP forecast to 8.5%. A good monsoon season, unlike last year, is helping the important agricultural sector. Whilst India’s major companies remain full of confidence, given their low-cost position. Reliance’s Jamnagar refining/petchem site is one of the world’s largest and lowest cost, after its recent expansion.
The news reminded the blog of a slide (above) shown by its long-standing friend, R D Udeshi, President of Reliance’s polyester chain, at our 2004 European conference. His argument was that China’s economic development would have to change course in time, as it moved from primary production to labour intensive manufacturing.
The slide tracks ‘years from beginning of economic progress’ along the bottom, versus ‘GDP per capita’ on the vertical axis. And its analysis has stood the test of time, with China’s labour costs increasing 25% in key regions such as the Pearl River delta in H1.
It suggests that, whilst there will be bumps along the road, India has a few more years of solid growth ahead before it reaches China’s current turning point.