Monetary Policy and the Indian Dream

This is a generation that dreams bigger and grander than Indians have done in a long time.

Bigger homes, bigger cars, bigger plasma TV sets...fat salaries and easy availability of credit have brought all of these and much more within grasping reach.

At least that was the situation till a few weeks ago.


GONE SOUR IN JUST A FEW MONTHS

The steep rise in international fuel and commodity prices over the past few months has pushed India's headline inflation rate to a 16 year high...and brought the dream down like a pack of cards.

Home loan rates have rocketed to 13 percent...from just over 6 percent two years ago. Most middle class Indians have to contend with a bigger chunk of their salary going towards repaying home loans.

20 year repayment terms have widened to over 40 years. Many now will have to pay monthly instalments on housing loans well past their retirement age.

Lesser and lesser people are queuing up to get new loans. Housing projects and the real estate sector have been hit severely...the dream house for many will have to wait.

Car sales too have been hit as auto loan rates rise.

Maruti Suzuki India, the company which makes half the cars sold in India, has already reporting weaker sales, as India's output growth in 2008 has averaged half last year's pace.

Passenger car sales in India fell 4.4 percent in August from a year earlier after declining 1.7 per cent in July, the Society of Indian Automobile Manufacturers recently reported.

More Indians are delaying buying their dream car.

Interest rates on consumer loans too have been on a steady rise...triggering a dip in the sales of TV sets, air conditioners, refrigerators and other white goods.

Weaker industrial production may deepen India's economic slowdown. The Reserve Bank of India projects the economy to expand at 8 percent in the fiscal year to March 2009, the slowest pace of expansion in four years.


SO IS THIS THE END OF THE DREAM

Some analysts say there is light the end of the tunnel...and that things would be back to normal in a few months.

They say international fuel and commodity prices are moderating, the inflation rate has peaked and is on a decline and that it is just a matter to time before other macro-economic indicators look up.

But others are more cautious. The new central bank governor Duvvuri Subbarao, who took over last week, is grappling with inflation running at 12.1 percent.

With inflation in double digits...stimulating growth by lowering interest rates may not be his first priority.

Some economists believe the central bank would tighten monetary policy at least one more time to get inflation under control before gradually starting to lower rates, most likely in 2009.

So at least till then the bigger new house, car and plasma TV would have to remain a dream for many in new India.