EMs should be cautious of asset bubble: ADB

Emerging markets including India should be cautious of asset bubble as QE by advanced nations may throw up such a risk

Emerging markets including India should be cautious of asset bubble as Quantitative Easing (QE) by advanced nations may throw up such a risk, the Asian Development Bank (ADB) said today.

"The positive thing of Quantitative Easing out of Japan and other economies is that they will start to grow, but we have to be wary of building asset bubbles" and economic overheating," ADB Managing Director Rajat Nag said at a conference here.

He said developing nations in Asia are facing inflationary pressures as manufacturing activity in the region is in full swing due to domestic demand.

"The robust growth that we have seen in Asia so far has eliminated slack productive capacity, so price pressures will begin to mount," he said.

On the impact of expansionary monetary policies on assets volatility in developing and emerging economies, Nag warned that easy monetary policy adopted by Japan is good for that nation and also for the entire Asian economy, but it will not come without a cost. "We will have to watch out how this whole issue of QRs develop in the coming months," he added.

As part of QE to boost domestic consumption, the European Central Bank yesterday cut interest rates by 0.25% to a record low 0.50%. It further indicated possibility of a further policy action to support the recession-hit euro zone economy.

Nag said the global economy is still fragile. "We are not out of the woods yet," he said, adding that sentiment was more bullish with the US economy showing signs of improvement.

He ruled out a currency war, saying it was unlikely in Asia as a result of the fall of the Japanese Yen due to QE.

The emerging Asian economies, including India, China, Indonesia and Thailand, are on track for solid growth of around 6.6% this year driven by domestic and regional demand, he said. These nations seem to be on a fairly stable growth trajectory as their economies are more reliant on domestic consumption rather than export-driven demand.

"As the centre of gravity in the world economy moves towards east and south, the power of institutions will also move towards countries like India and China and it is inevitable for these countries to look for other institutions of funding which is also manifestation of monopolistic economic structure," Nag said.

The recent fall in global commodity prices will have a positive impact on India because of inelastic demand for oil.

On BRICS Bank and its challenge to multilateral financial institutions like ADB, Nag said Asia needs around $800 billion for infrastructure every year and ADB is only able to provide financing for around $21 billion, which means that need of the region is huge and if some other institution is there to supplement that it is good.

On India's tax structure, Nag said the country should focus on broadening its tax base and collecting it from people who do not pay taxes, instead of focusing much on marginal tax rates.