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India’s Economy Slows Down Due to Inflation and High Interest Rates

  • Anjana Pasricha
  • New Delhi

When India’s economy grew by seven point eight per cent in the first three months of the year -- its slowest pace in 15 months -- economists were not surprised.

D.H. Pai Panandiker, who heads the RPG Goenka Foundation in New Delhi says growth was expected to take a hit after nine interest rate hikes in just over a year by the Reserve Bank.

“Interest rate has gone up by nearly three per cent in the last one year, so that is having its toll on everything, on the market, the investment, the durable consumer market and so on.”

The higher cost of borrowing money is affecting several sectors of the economy. Car sales have slowed. Industrial production has fallen. Indian stock markets have lagged behind others in Asia.

The interest rate hikes are meant to tackle inflation, which has hovered around ten per cent for almost two years, and is among the highest in emerging economies. But efforts to control rising prices have had little impact so far.

On the other hand, surging international crude oil prices have added to India’s worries and prompted the government to raise gasoline prices by nine per cent two weeks ago. The move could further fuel inflation.

As a result, the recent interest rate hikes are expected to continue - another is expected in mid-June.

Economist Panandiker warns that the government’s estimates of about eight-and-a-half percent growth this year are unlikely to be met.

“Some slowdown is inevitable. This is the price we have to pay for inflation -- that is lower growth. In spite of steps taken by the government, the inflation is not coming down. That is the critical part of it.”

But there is a positive prospect for the economy. Meteorologists have forecast that monsoon rains, which are critical for farmers, will be normal. A good monsoon usually helps cool food prices.

And while growth may be slowing, India is still forecast to remain the world’s second fastest growing major economy after China this year.

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