Too hot to handle. India’s Economy

From the Economist: Too hot to handle. India's Economy

Why the sizzling Indian economy is more at risk than China's

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China's double-digit growth may look like a danger sign but there are few of the usual troubles. Inflation is only 1.4% and China has a widening current-account surplus, which implies excess supply rather than excess demand. Nor do asset price gains look particularly excessive. Average house prices have risen by less than 6% in the past 12 months. And share prices have gained only 42% in the past four years. Even the expansion of bank credit has slowed to an annual pace of 15%, not much faster than nominal GDP growth.

In contrast, India's economy displays an alarming number of signs that things have gone too far. Consumer-price inflation has risen to almost 7% (see chart), well above Asia's average rate of 2.5%. A recent report by Robert Prior-Wandesforde at HSBC finds many other signs of excess. For example, in a survey of 600 firms by the National Council of Applied Economics Research, an astonishing 96% of firms reported that they were operating close to or above their optimal levels of capacity utilisation—the highest number ever recorded. Firms are also experiencing a serious shortage of skilled labour and wages are rocketing. Companies' total wage costs in the six months to September were 22% higher than a year earlier, compared with an average increase of around 12% in the previous four years.