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Warning of unrest as trouble grows in India

India's ambitions of becoming an economic superpower are on hold as fears of a slowdown loom.

Inflation in India increased to 9.06 per cent in May. AFP
Inflation in India increased to 9.06 per cent in May. AFP

MUMBAI // Not so long ago, India was on the verge of double-digit growth. But ambitions of becoming an economic superpower are on hold as fears of a slowdown loom.

The economy expanded at 7.8 per cent in the first quarter of the year - the slowest pace in five quarters.

Yesterday, the Reserve Bank of India (RBI) raised key interest rates for the 10th time since March last year, despite warnings by analysts that high interest rates could dent the main drivers of economic growth: domestic consumption and investment.

Signs of trouble are already visible. Last year, foreign direct investment in India fell 32 per cent from 2009 to US$24 billion (Dh88.15bn). The rate of investments in India plunged to 0.4 per cent in the January to March period compared with 20 per cent in the same period last year. Industrial production slowed to 6.3 per cent in April from 8.8 per cent in March.

D Subbarao, the governor of the RBI, said the interest rate rises were warranted to deal with rising inflation, which Credit Suisse bank called India's "horror show".

Inflation increased to 9.06 per cent in May compared with 8.66 per cent in April. But policy analysts say raising interest rates incessantly is akin to pressing the brake pedal and the accelerator at the same time.

"The slowdown has been due to a near collapse in the investment cycle," says Rohini Malkani, an economist with the investment bank Citi India. "Higher rates could take a toll on investments and consumption."

Aggressive monetary tightening threatens to destabilise the growth of the industrial sector, which the country heavily relies on to absorb the millions of people entering the workforce every year. Such action could spark widespread social unrest, Udayan Bose, the chairman of India's employer association's corporate finance committee, warned in a letter this week to Mr Subbarao.

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