The Indian economy is roaring again, but rising prices threaten recovery


A surge in holiday spending has fueled hopes that India will regain its title as the world’s fastest growing large economy, even as analysts warn of profound challenges facing a country whose consumers and businesses are still affected. from the coronavirus pandemic.

Sales on Diwali, the Hindu festival of lights that was celebrated last week, jumped to a record 1.25 trillion rupees ($ 16.8 billion), according to Nomura, a 75% jump from last year. year and well above the usual 20%. annual growth.

The surge underlines that economic activity has rebounded sharply, contributing to the bullish mood. This is partly due to a steep drop in daily Covid-19 cases to around 11,000, from 400,000 in May, when a brutal wave of infections engulfed healthcare systems.

Other indicators, such as mobility and electricity demand, have also fallen back. But economists are divided on how sustainable the rebound is, since rising prices pinch consumers and coal shortages threaten to dent industrial production.

Rs bn histogram showing Diwali retail sales

“Cases are on the decline. . . and since last year’s Diwali was pretty subdued, everyone was out and about during this time, “said Shumita Deveshwar, senior director of India research at TS Lombard.” This is a short-term push. I don’t know if it will turn into a long-term recovery. “

The IMF expects India’s gross domestic product to grow 9.5% in the year ending March, compared to 8% in China and more than any other major economy. This, however, reflects a correction after it fell by 7.3% last year and will leave the size of the economy little changed from two years ago.

India on Friday will report its latest inflation and industrial production data, which should highlight some of the challenges the recovering economy still faces.

Growth in industrial production has been slowing since the summer, exacerbated by factors such as sharp cuts in automobile production forced by the global shortage of semiconductors. The recent coal shortageIndia’s main source of electricity has prompted the government to divert fuel from industries such as steel mills to the electricity system.

Analysts said the energy crisis has threatened the production of metals and other basic materials. “This would obviously have a spill over effect on other sectors,” said Aurodeep Nandi, economist at Nomura. “I don’t think we’ve reached a stage where all of this is still reflected in the data.”

Retail inflation, meanwhile, fell from over 6% in June to 4.3% in September. But sustained price increases hurt consumers, which prompted the government to cut taxes on gasoline and diesel this month.

“We are seeing indicators that paint a mixed picture,” added Nandi. “This is the challenge in understanding what is happening with the growth at this point.”

Oxford Economics, a research group, said further progress on vaccinating the Indian population is needed to support the recovery.

India has administered a Covid-19 vaccine to more than half of its population, with a fourth completely inoculated. Oxford predicts that 70% of Indians will be fully vaccinated by the first quarter of next year.

“There appears to be some loss of growth momentum,” said Priyanka Kishore, India’s head of Oxford Economics. “It’s a soft patch. . .[but]I am quite optimistic about 2022 “.


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