The wheels are falling off the Indian economic boom as high oil prices and food costs send inflation soaring and interest rates higher.

India is now the poorest performing of the quartet of emerging economies called the BRICs: Brazil, Russia, India and China. The surge in Indian inflation and the jump in interest rates is a reminder to those in Australia who uncritically believe in the resources boom: it’s not going to continue without a few hiccups.

Indian inflation jumped above 11% in the first week of this month to a 10-year high, and overnight the Reserve Bank of India lifted its key interest rate for a second time in two weeks to 8.50%, the highest level in six years. It also lifted the reserve asset ratio to try and cut bank lending: a step similar to what China has been doing

Two weeks ago the Indian Government took tentative steps towards lifting retail costs of oil and other fuels by allowing price rises because the country’s state-owned oil companies were in danger of being bankrupted by the soaring cost of oil and the fixed retail price for its products.

Australian commentators often lump India with China as they argue for the continuation of our resources boom. Supporters point to India’s rapidly growing middle class, politicians and the emergence of world scale companies in steel, telecommunications, pharmaceuticals, computer services and the film industry: and it has seen rapid growth and for Australia, considerable growth in exports, cultural ties and economic and political links.

Back in 1999 India had a 1.7% share of our exports; last year that had risen to 5.2% with the fastest growth rate in those eight years of 24.7% a year. Since 2003 the Indian economy has grown at an average 8.8% a year, second only to India, hence the enthusiasm for the country in the West.

Many private analysts and those in government see further great gains to be made, but seemingly ignore the rapid emergence of financial pressures that threaten to halt the boom in a very traditional Indian fashion.

India has national elections early next year and the central Government has been trying to position itself ahead of those with some grandiose spending plans on debt relief for poor people and other aid packages. Food prices have soared, along with oil costs to the point where the Indian Government has banned the export of some types of rice, stopped futures trading in some commodities, and threatened to restrict trading in others.

The worldwide surge in steel prices, which is now accelerating in the wake of the huge iron ore and coking coal settlements Australian suppliers are winning in China, Japan and South Korea. The higher cost of coking coal is a big worry for China as is the soaring domestic cost of steel prices.

But the sharp rise in oil prices is India’s biggest problem: it imports 70% of its annual consumption and the higher cost is boosting inflation. The Indian rupee has lost more than 8% in value this year and the latest rate rise won’t help because foreign investors have been selling Indian shares.

The local stockmarket has fallen 30% in the past couple of months as the enthusiasts for the Indian story get a dose of reality.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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