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ANALYSIS

Indians fear repeat of 1990s as inflation soars

AFP, New Delhi
With inflation shooting to a dizzying 13-year high, Indians are wondering whether they're watching a rerun of an old horror movie they'd rather not see again.
On Friday, inflation raced to 11.05 percent from 8.75 percent a week earlier, sending shares to a 2008 low as investors raced for cover fearing more interest rate hikes that would hit company profits and slow the economy.
The annual rate -- the highest since May 1995 when it stood at 11.11 percent -- also stunned economists as it was more than a full percentage point above market forecasts and spawned headlines like "Price quake hits Indian economy."
"We re getting into very dangerous territory," India's HDFC bank chief economist Abheek Barua told AFP
The country's leading daily the Times of India noted the situation bore an eerie resemblance to 13 years ago when the current prime minister Manmohan Singh was finance minister in a previous Congress party-led government.
"Will history repeat itself?" the paper asked on the week-
end, calling it "Unlucky 13 for Manmohan."
Back in 1995, foreign exchange coffers were brimming, the stock market was barrelling along and economic growth was strong. Companies had embarked on huge investment programmes to expand production capacity.
But the good times stopped when the government was faced with double-digit inflation and elections - - like now - -were less than a year away.
To contain inflation, the central bank jacked up interest rates. Stocks dived and economic growth fell as firms struggled to fund ambitious expansion plans with interest rates at 18 percent -- and Congress lost power.
The current Congress-led government has been desperate to tame inflation with elections due by May 2009, fearing a voter backlash from India's poor masses who have been hardest hit by price rises.
The latest inflation jump, which came after a sharp rise in state-set oil prices, has come on top of a slew of other indicators showing the trading deficit widening to record peaks, the fiscal deficit among the world's highest and economic growth slowing.
Is India headed for "the perfect storm" after five boom years? asked T.N. Ninan, editor of Business Standard in a weekend column.
The phrase comes from the title of a true story about three weather systems colliding,
creating a furious storm, and is now used by economists to describe a situation where circumstances combine to produce a financial wipeout.
HSBC economist Robert Prior-Wandesforde said inflation could "remain in double-
digits for at least nine months." Some economists, like Ashok Desai, former chief consultant to the finance ministry, see it rising to 15 percent.
"This horse -- inflation --has bolted. However hard the government slams the door
now, the damage is done," said veteran Indian columnist MJ. Akbar.
Several economists forecast a half-point rise in India's leading short-term lending rate, the repo, along with other aggressive credit-tightening measures - possibly within a few days.
But industry has been warning against over-zealous tightening, especially since much of the inflation comes from forces beyond the government's control -- like global crude prices which have doubled in the past year.
"When we had a long period of economic recession beginningin 1996-97, the trigger was the preoccupation with inflation," noted T.K. Bhaumik, economic advisor to business lobby Assocham
For the moment, the government said it is sticking to its forecast of 8.5 percent growth for this financial year ending in March, down slighdy from last year’s red-hot 9.0 percent.
But economists have been coming up with forecasts as low as seven percent, still strong by Western standards, but not the double-digit growth economists say is needed to lift hundreds of millions from poverty.