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By Mike Caggeso
India's annual inflation clocked in at a shockingly low 0.61% in the week ended May 9, and 0.48% the week prior, opening a window for policymakers to resuscitate the economy without worrying about consumer unrest.
Inflation in India – a rampant problem for years – is hovering near a 30-year low. In fact, it's stayed below 1.0% for the past two months. This after reaching a 16-year high of 12.91% last August, Bloomberg reported.
And the timing couldn't be more perfect.
Many economists and world leaders believe the worst of the global financial crisis has passed. Most of the world's largest economies are showing signs of improvement after trillions spent in stimulus measures.
More specific to India, the country is coming off a landslide election that reseated Prime Minister Manmohan Singh's Congress Party and a host of new policymakers eager to make their mark on the second most powerful emerging market in the world.
Immediately after the election, India's benchmark stock index launched a record 17% in one day. Those gains leapfrogged India's Sensitive Index (or Sensex) past all other world indices – except Peru's – in year-to-date gains.
But such a remarkable one-day run only puts more pressure on reelected and newly elected officials to keep momentum going.
Since October, the Reserve Bank of India has lowered the primary interest rate six times, from 9.0% to 3.25%. The last was a quarter-point reduction on April 21.
India has already passed two stimulus packages, and Singh said that the new government's.
"Inflation is not a primary concern at this point of time and that gives policymakers leeway to focus on policies that will help stimulate slowing demand," Sonal Varma, a Mumbai-based economist with Nomura Securities Co., told Bloomberg. "While inflation can post negative readings, this cannot be characterized as deflation."
Singh will begin forming India's government this week. But despite the wave of popularity Singh is riding right now, Money Morning's Martin Hutchinson is skeptical his Congress Party will deliver the economic reform the economy needs.
In fact, it's "likely that the Indian government will continue as an ever-increasing drag on the economy, with a funding crisis possible if public spending increases too much," Hutchinson wrote early this week.
The result could spell a 4% to 5% growth average over the next five years, with "possibly with an acute foreign exchange crisis at some point," Hutchinson said.
These problems are short-term, however, Hutchinson said, as not even the strongest chains could keep India's economy from growing over the long-term.
"Indian shares will once again be worth looking at, if only because of the country's immense long-term-growth potential – an upside great enough to overcome even the immense drag of most of its governmental shortcomings," Hutchinson said.
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