By: Dr. Mike Campbell

Figures released by the Finance Ministry indicate that the Indian economy is slowing, but even so, the slower rate of 7.7% would have most major economies green with envy. So, one would assume, all is rosy in the world’s most populace democracy, then? Hardly so, unfortunately.

The obvious elephant in the Indian economy is inflation. According to official figures, inflation is running at 9.2%, this is well over twice the Reserve Bank of India’s target range for inflation of 4 to 4.5%. In a nation with an estimated 25% of the population living in poverty and a GDP per person figure of just $3500 (in the USA, this figure is $47200), rising prices is a major issue. There is, of course, an enormous gulf between the income of the rural and urban poor and city dweller in good employment. Food price inflation is a critical social problem which has the potential for sparking civil unrest. The Reserve Bank has raised interest rates on eleven occasions since March 2010 and has succeeded in bringing the rate down from 11%.

The central bank estimates that growth for the full year will come in at 8%, but some analysts are expecting the figure to be nearer to 7% as the effects of the global slowdown bite. With inflation running stubbornly high, even a GDP of 8% may not be enough to allow the government to make inroads into tackling the nation’s poverty problems.

Business confidence is at a two-year low according the Indian Chambers of Commerce with many businesses concerned that the world economy was headed for recession and fears that domestic demand will be hit by the higher interest rates imposed by the Indian Reserve Bank as a means to tackle inflation.