Recovery : Will it sustain?

Global economy is on a recovery path, led by emerging countries with China and India at the forefront.  This recession was different and so has been the recovery.  Emerging countries like India and China were relatively underleveraged heading into the recession and managed to avoid slipping in negative growth territory.  Last month, India reported IIP (Industrial Production) growth of 16%+, GDP estimates have been revised up to 7.5%+ and jobs are growing in high teens.  Now, the question is if the recovery will sustain. 

• Central banks lag behind the inflation curve - With inflation at 9%+ and food prices up by 20%+, Indian central bank is under strong pressure to increase interest rate.  Markets have already taken that into account, with 10yr Govt Bond yield crossing 8%+ (still implying negative real interest rates).  Monetary policy action is around the corner.  However, central banks are known to be slow in ramping up interest rates as political opposition and recent memories of economic slowdown creates obstacles in decisive action.  We can expect a gradual ramp up in interest rates and with economic growth momentum continuing to build up, we have at least a couple of good years ahead of us.
• Savings rate continue to hover close to 35% - Domestic savings rate in India touched 35%+ a few year ago which was cumulative effect of increase in efficiency of capital deployed by the Government and the private corporate sector.  Increased privatisation of services like telecom, airlines, airports, roads, education and healthcare meant increase in capacity for these services without the Government adding its own inefficiency in capital allocation and implementation.  Historically, India has a incremental capital output ratio of close to 4:1, that is, for 35% savings rate, India can expect to grow at close to 9% over the medium term.
• Increased productivity - Better telecom services, increase in use of IT, penetration of banking services in smaller towns and cities, private investment in road and power and increase in availability of the skilled workforce has resulted in significant increase in productivity across the Indian economy.  Some of the benefits will flow in over the next decade or so, Indian economy will continue to reap the dividend of increased productivity for sometime.
• Diversified economy - India is not dependent on any one sector or industry, even though IT services continue to be an important wealth creator with strong multiplier effect. 

I am therefore not unduly concerned with prospect of increase in interest rates over the next 18 months or so. What's your view, do share in your comments.