Political India: Engaging America

From The Hindu

While economic growth in Asia, including India, has been strong in 2010, its sustainability in 2011 will require “policy tightening,” lesser reliance on export-led growth and an overall rebalancing that requires moving away from this year's stimulus policies, according to Anoop Singh, Director for the Asia-Pacific region at the International Monetary Fund (IMF).

Speaking to a group of journalists at the Fund's headquarters here, Mr. Singh said that Asia “performed remarkably well in 2010,” and in part Asia's own growth was led by strong growth in China and India.

In particular, such growth had been spurred on, in the first half of 2010, by a rebound in global manufacturing, a rise in domestic demand and also “appropriate policy stimulus.” In the second-half of 2010, there was a “moderation of activity, but we have leaned towards a more sustainable pace,” Mr. Singh said.

He noted that the IMF expected growth in Asia to remain relatively strong and continue at a “fairly robust 7 per cent in 2011, which we see as a sustainable rate.”

However, Mr. Singh cautioned that despite this prospect, Asia remained subject to downside risks from the external environment, including the risk that global growth could be weaker than expected in advanced economies; and that there could be risks arising from the “financial spill-over” also from advanced economies to Asian banks, firms and sovereign debt.

In this context, two major policy challenges remained — the first relating to the exit of Asian economies from the policy stimulus, “which Asia has certainly enjoyed for the last year-and-a-half.” The second challenge pertained to capital inflows that the region faced along with other emerging markets “and this is partly because of the growth divergence relative to advance economies.”

In response to a question from The Hindu on why the Fund recommended policy tightening when there were still some possible downside risks to growth that could emerge from advanced economies, Mr. Singh said, “In the short run, Asia and India have clearly seen that the output gap is closing and inflationary pressures exist.”

He noted that for example, while core inflation had risen in India, the IMF expected that such inflation “should decline in the coming months [and] the government is quite sure that it should be down to 5.5 per cent in March.”

Further, he said, macroeconomic indicators have lags and in India monetary policy works with long lags. Thus the IMF estimated that “the peak effect of monetary policy in India, on inflation, probably takes five to six quarters. We see... in many parts of Asia, including India, that the real policy rates are low or negative, which is somewhat inconsistent with where the output gap is and where inflationary conditions are.” Hence the conditions were right for removing the macro stimulus, he added.

Mr. Singh said that overall, “We know that Asia is an economic powerhouse and it accounts for an increasing share of the world's growth. In large part due to the rapid growth in India and China over the last ten years, and this is expected to continue over the medium and longer term.”

He said that in order to maintain these high growth rates, the region would need to rebalance and would reduce its reliance on export-led growth. “Rebalancing will be the key to sustaining growth partly because the growth in advanced economies will remain sluggish... for some years,” he said.

Labels: Asian economy, International Monetary Fund