India's Contradictory Economics

by: Ketan Desai

At the recently concluded G20 meeting, India took two positions that made no sense.

1. First, it backed the U.S. Fed's loose monetary policy of pumping $600 billion into the economy. Knowing fully well that some of that money could end up in India, the Indian government said it was "comfortable with inflows of up to $80 billion." With inflation at about 8% in India, and growth at about 9%, what is the government thinking? Injecting $80 billion into a trillion-dollar economy amounts to an 8% stimulus. Does the Indian economy need that -- especially at a time when the Central Bank of India is raising rates? It just doesn't make any sense ... unless the Indian government was paying back Barack Obama for a seat in a reformed UN Security Council. In which case:

2. It blew it by refusing to go along with the U.S. in confronting China over its yuan policy. India has a significant trade deficit with China, one which could be reversed if the yuan was stronger. But, instead, it stayed mum on the issue, leaving the U.S. high and dry. Not the way to win friends and influence people. And not the way to run an economy.

All of which leaves me with one last question: Is India scared of China?

Disclosure: No positions.