India: Signs of overheating

The economy grew very rapidly at the beginning of fiscal year 2006, expanding by close to 9%, after rapid growth during the previous year. Some signs of overheating have emerged: inflation has picked up to over 6%, though food prices are in part responsible for this movement; and the current account moved into a deficit of 1.3% of GDP in fiscal year 2005 and is likely to widen somewhat in fiscal year 2006. Agricultural output may weaken slightly bringing growth down to 8% in fiscal year 2006. In 2007 and 2008, the effects of the current tightening in monetary growth should be felt, slowing growth to 7% by the end of the projection period and ensuring that inflation moderates slightly, to around 5%.
At this stage of the business cycle, the authorities need to avoid a pro-cyclical fiscal policy in which unexpected revenue gains are largely absorbed by increased government spending. Cyclical strength of revenues should result in the budget deficit falling within the targets set by the Fiscal Responsibility and Budget Management Act. Monetary policy needs to ensure that broad indicators of inflation stay below 5%, in line with the shared target of the central bank and the government.
Population (000s), 20051 091 000
Area (000 sq km)3 287
CurrencyRupee
GDP (Billion USD), 2005633
Life expectancy at birth (Women, Men), 2004 64.0, 63.0
Total labour force (000s), 2004451 733
Government typeDemocracy
Indicators% change unless otherwise indicated
200620072008
Real GDP growth8.07.57.0
Inflation 5.05.55.2
Consumer price index6.15.85.5
Short-term interest rate7.37.77.7
Fiscal balance
(% of GDP)
-6.7-6.3-6.0
Current account balance (% GDP)-1.7-1.7-1.8
Source: OECD©OECD Observer No. 258/259, December 2006


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