For long India has been wary of its rising population. The population has always been seen as a burden on the already limited resources of the country. Economists always believed that the such a huge population can only be bad for the well being of the economy.

Surprisingly though, the tables seem to have turned. It seems that the large population that India was so embarrassed about has been the largest factor in the economic development of the country. The large population means that the country has more consumers and a larger workforce – all of which contributes to the country’s ever growing GDP.

It is only due to our large population that we have more workers to work in both the industries and the goods and services sectors. Of course, the demand and pressure on resources remains high but then even the returns are high. When the balance between the two is seen, it tips in the favor of growth.

This indeed is good news for India, as what we felt was a liability is in fact a strength.

The Reserve Bank of India came up with a surprise rate hike late last Friday after market hours. The central bank raised both repo and reverse repo rates by 25 basic points, with only a month remaining for its quarterly policy review in April.

The central bank governor D. Subbarao justified this action by stating that exiting from easy money policy is to be continued to keep the economy on the projected growth trajectory. He said, “Indian economy is heading for a hard landing. In order to curb anchor inflationary expectations and contain inflation going forward, we believe it is better to take some action now and continue on exit strategy.”

According to RBI governor, Indian economy will be bogged down by demand-side pressure in the near future and to contain this scenario, it is better to take immediate action rather than wait for the situation to worsen.

“In RBI, we have maintained the need for exit from stimulus and also that India might have to exit from the accommodative stance ahead of other countries because of our own inflation-growth trade-off,” he said.

The rate hike was essential to curb overheating of the growing economy. Though the economy is growing at a healthy rate, inflation is threatening to dampen the good show. While in November, the inflation was contributed entirely by the spiraling food prices, by February, the food prices have come down and the inflation has spread to non-food items. This is not a happy situation.

In a poll conducted by Reuters among economists after the last rate hike, there are strong indications that by the end of the current year, the rates would be raised by a total of 100 basic points. This is more than that expected earlier.

The Reserve Bank of India is under severe pressure to hike interest rates, as January data reveals wholesale price index-based inflation at a 15-month high of 8.56%. Economists are divided on the issue whether RBI would raise the rates immediately.

Bad news brought on by the latest data is spreading of the effects of inflation beyond food items. Manufacturing sector is the latest victim with machinery and chemicals being the worst affected.

RBI forecast was 8.5% for the fiscal ending in March. With inflation soaring past this figure in January itself, it may even reach double-digits by March end. In case the proposed price hike for petroleum fuels is implemented, the result may be more disastrous.

The recent development is boosting the importance of Union Budget presentation due on 26 February. Even as the probability of double-digit inflation is high, economists are optimistic about the outcome in the long run. Predictions are that the inflation would peak during coming July and display waning tendencies thereafter.

Meanwhile, projection for February is anywhere in the range of 9 – 9.5%. Experts point out that the spike in inflation rate during January was mostly from runaway food prices, fueled by rise in the prices of manufactured goods.

The interest rate hike, touted as a solution to contain inflation is double-edged, according to most economists. Its success in reining in inflation depends on the timing of its implementation. As the inflation has spread to other sectors, a rate hike is projected as a viable solution and hence inevitable.

RBI had said last week that the rates would be reviewed only during RBI’s next policy review scheduled in April.

The stock market reacted to the new data by shedding 114 points (BSE’s Sensex) to close at 16,038.85.

Any recent study of world economies will invariably result in a comparative analysis of the two Asian neighbors – India and China. While China is much ahead in the race with its fast-acting government, better infrastructure and superior growth rate, India is nipping at its heels to equalize and eventually overtake.

Whenever the two economies are compared, China emerge winner, winning applauds from one and all. However, the latest studies of the two economies open up newer perspectives. These new revelations give India a definite advantage over China in the economic growth race. The advantage comes from the differences in the economic structure of the two countries.

Both countries went all out with stimulus packages to revive their economies. While China’s stimulus programs stand at 6% of GDP, India could mange only 3% of GDP. The surprising fact is Indian economy managed to weather the economic storm much better than China, though the present growth rate for India (6.4%) is less than China’s (8.7%).

Limited exposure to international markets was always thought of as India’s shortcoming. However, this turned into an advantage and paved way for its fast recovery. China relies more on export than domestic spending, which is pegged at 35%. India’s domestic spending is a healthy 57%, which cushioned its fall during recession and helped it rebound with ease.

China almost doubled its credit growth and relied on infrastructure development and tax benefits, which led to unprecedented increase in property prices in Chinese cities. This has placed the country’s banking system on shaky grounds, which raises the question whether China’s amazing growth is sustainable.

India on the other hand managed to survive the crisis without risking its banking sector. This, according to economists, will place India in a better position during 2010.