MUMBAI, India –- After three years of near double-digit expansion, India has an economy many countries would envy. But now signs are emerging of a potentially dangerous inflationary spiral, and the country’s government is considering taking steps to make sure the economy doesn’t "overheat,” as one newspaper recently described it.

While inflation in India remains lower than in other developing countries, the New York Times reported that Prime Minister Manmohan Singh and his economic advisors recently met to discuss their concerns that India’s economic expansion was "starting to overheat.”

The signs are already there that this is already happening: prices are rising more than twice as fast as in China. Prices, said the newspaper, are also increasing "considerably” faster than in industrialized countries.

India’s economy is expected to expand 10 percent this year. In addition, news sources said wholesale price inflation has accelerated to six percent from four percent last spring. Consumer price indexes have increased nearly seven percent in urban areas over the last year and almost nine percent in rural areas.

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According to the Times, government economists attribute rising food prices in India to global factors like a poor harvest in Australia or the growing use of crops to produce ethanol. But others connect the increase to the government’s encouragement of futures trading in agricultural commodities.

The governor of the central bank remains optimistic about inflation and the Indian economy. The newspaper reported he cited the lagged effects of interest rate increases over the last year that hadn’t as yet fully worked their way through the country’s economy. He also noted that Indian companies were investing in additional capacity.

But the central bank’s surveys showed the practically all of India’s manufacturers were operating at full capacity, and many factory expansions and new factories will be ready in 18 months to two years.

There’s also the developing trend of consumers buying on credit since Indian banks, awash with deposits from foreign investors, have been lending aggressive to consumers.

One analyst said "demand for everything from housing to beer is outpacing supply in part because salaries are rising faster in India than anywhere else in Asia…”

Salaries increased 13.7 percent on average over the last year.

Some analysts and executives have opined that productivity gains would allow India to get more out of the businesses it already has, thus avoiding supply "bottlenecks that can feed an inflationary spiral.”

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