High Inflation : Very Serious Threat to India’s Booming Economy.

Inflation is like sin; every government denounces it and every government practices it” (Frederick Leith )

In India, fears are growing that runaway inflation could slowdown the brisk growth of its economy, which was among the fastest to recover from the global financial crisis. In particular, a huge rise in food prices has emerged as a major worry for a country with millions of poor people.

Food prices have been rising across much of Asia, but India is battling the highest inflation rate in any major Asian country. Food inflation has been running more than 10 percent, in the past year. But it made headlines when it crossed 18 percent in last December, after prices of Indian favorites such as onions, tomatoes and garlic spiked. More money has to be forked out for milk, meat and lentils.

Economist Ila Patnaik, at the National Institute of Public Finance and Policy in New Delhi, describes inflation as a very serious threat. The high prices of food have become a top issue in a country where nearly half the one point two billion people are poor and spend a large chunk of their meager earnings on food.

Inflation has emerged as a challenge for policymakers, at a time when optimism was running high at the economy’s quick return to nearly nine percent growth following the global economic downturn. That optimism is getting tempered as worries grow that inflation has become entrenched.

Economists say high food prices are not the only worry. The rising cost of fuel and other raw material could also impact industry. India’s manufacturing sector has slowed down and foreign investment in the country last year declined, despite its booming economy.

The high inflation and rate rises are starting to hit corporate margins in India, tempting more foreign fund managers to slash holdings in favour of markets that can better capitalise on the global economic recovery.

With oil and food prices not seen easing in the near future, money managers reckon the exodus has some more months to run. This January alone, foreign funds have pulled $900 million from Indian equities, Thomson Reuters data shows. This contrasts with the record $29.3 billion they pumped in last year.

India's central bank, which raised interest rates six times in 2010, is expected to increase rates by at least 25 basis points on January 25, (Reuters poll) Analysts forecast rates to rise by 75 basis points in 2011.

India has the highest rate of inflation among major developing economies, In June, 2010, India's inflation based on the Consumer Price Index for Industrial Workers (CPI-IW) stood at 13.7 per cent, much higher than that of Indonesia, Brazil, China and Russia. Prices in India are raising more steeply than even neighbouring countries like Pakistan (12.7 per cent), Sri Lanka (4.8 per cent) and Bangladesh (8.5 per cent in April).

It is very difficult for the common citizens of India to know that why the inflation in India so stubbornly high and so much higher than other emerging markets, even those that are supposedly overheating, such as Pakistan, China, Korea, Indonesia etc, where inflation is closer to 5 to 12 per cent?

In a nutshell, high inflation can be detrimental to the prospects of any growing economy.

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