It was recently announced that Indian GDP at constant prices grew at the rate of 9.2% for the period July- 06 to September- 06. But the concerns are already being expressed whether this growth rate is sustainable.
There is an indication that economy is overheating. In simple words, demand seems to be outpacing the supply. How can one say that?
The first measure is obviously the inflation rate, i.e, the rate at which the prices are increasing. The wholesale price index is up by 6.7%, way above the RBI benchmark of 5.5%. The consumer price index, CPI is also showing the same signs. In fact, the CPI has gone up by almost 8.3% for rural laborers and 6.9% for urban non- manual employees for the period ending Dec.’ 06.
For an open economy, one must also look at balance of payment figures as excess demand will be reflected in excess of imports over the exports. If imports (as a proportion of GDP) are increasing then demand pressures are strong. India's deficit widened to more than 3% of GDP in the three months to September--a huge swing from a surplus of almost 4% in the first half of 2004. Excluding workers' remittances, India's trade deficit is running close to 5% of GDP.
These numbers have given rise to a debate as to the current growth rate is sustainable or not, i. e. can India grow at current growth rate without creating inflationary pressures.
