Manufacturers; Inflation Separates India And China

The difference between economic growth in China and India, still the hottest and most attractive countries for a variety of manufacturers, is inflation.

Although consumer prices are rising in China's rapidly growing economy, they're not accompanied by the sound of galloping inflation. In April and May of this year, inflation as measured by changes in consumer prices, was up an average of 1.3% compared with April and May of 2005, notes Cliff Waldman, an economist at the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group. Inflation in February and March of this year was up an average of 0.9% compared with February and March 2005. "Chinese inflation has picked up somewhat in recent months, although the price picture remains quite benign," says Waldman.

Meanwhile, China continues to post extremely strong real economic growth. Although some forecasters expect China's GDP growth to slow to 8.9% in 2007 from 9.6% this year, "there is no indication of an imminent slowing," observes Waldman. Indeed, fixed investment, the key driver of growth in China, "appears to be accelerating in spite of significant government efforts to slow bank lending and investment demand," states Waldman.

"Benign" is not a word Waldman would use to describe inflation in India. The word "concern" is.

The consumer price index for urban non-manual employees in India increased at an annual rate of 5.3% in the final quarter of 2005 and 4.9% in the first quarter of this year, Waldman relates. "Clearly, the Reserve Bank of India will continue to raise interest rates to stabilize the rupee [India's currency] and to tame elevated inflation," he says.

At the same time, India's merchandise trade deficit with the rest of the world is growing, and, says Waldman, "markets appear to have growing concerns about India's capacity to finance its growing trade gap."

Waldman's bottom line: India's GDP growth is expected to slow to 7.2% during fiscal 2007 from 7.6% this fiscal year. Consumer price inflation will likely remain high, rising 4.6% this year and next.

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