| 11.2°C Belfast

Why India’s own belt-tightening could threaten our recovery

The assorted British politicians, business leaders, and cultural icons accompanying David Cameron and George Osborne on the great trade mission to India might want to ask the Prime Minister and his Chancellor what they think about the surprise decision by the country's central bank to raise interest rates by half a point yesterday.

Like China and Brazil — two other all-important Bric nations — as well as much of Asia, India is tightening its monetary policy more rapidly than many had |expected.

And that process might be a real threat to the tepid recovery of Western economies, rather undermining the efforts of Messrs Osborne and Cameron to improve Britain's exports performance, worthy though these are.

Increasingly, the global economy is fractured between East and West. China, India, and Brazil are all now racing to keep a lid on inflation, by paring back on the policies that have fuelled their rapid economic growth.

The US, the UK, and Europe, meanwhile, have yet to convincingly escape the clutches of recession.

In some senses, the anti-inflation efforts of countries such as China are to be welcomed.

In the UK, inflation remains higher than we would like, with the Bank of England's Monetary Policy Committee now split on whether we have reached the moment when we should be confronting the issue.

Its worst nightmare is a further spike in inflation,prompted by the sort of runaway demand for commodities that rapid growth in China and elsewhere could prompt.

It would have almost no choice but to raise UK interest rates, whatever the performance of the economy.

Still, as the global economy has bounced back from 2009 — when it registered its most depressing statistics since the end of the Second World War — it has been the East that has taken the strain. It is not at all clear that the West is prepared to pick up the baton.

If growth in India, China, and Brazil slips back too markedly, we will see the US and Europe fall back too.

In our case, the decline will mean a return to recession, rather than slower rates of expansion.

This is not the responsibility of the Reserve Bank of India. It must chart a course for monetary policy with its own country's interests in mind, and it is quite clear that India's economy has been racing ahead too quickly for its capacity.

Britain's delegation to the country is right to target India as a prime candidate for improved trade relationships.

But while that is a worthy long-term goal, Mr Osborne and his boss this week have a front-row seat on a more immediate problem: that India and its fellow economic powerhouses are now calling time on their willingness and ability to nurse the world back to financial health without help from the West.

Belfast Telegraph