The Asia-Pacific region recovered impressively from the depths of the global financial crisis of 2008-09, with China and India leading the recovery. The developing economies of the region grew at 8.3 per cent in 2010 compared to 4.6 per cent in the previous year. However, the region faces fresh downside challenges as it enters 2011. For one, growth prospects for the year will be affected by the slowing down of advanced economies in the second half of 2010 following the withdrawal of expansionary fiscal policies in the light of mounting debt crises. The United Nations Economic and Social Commission for Asia and the Pacific’s (UN-ESCAP’s) latest projections suggest that the average growth rate of developing economies in the region may come down to 7 per cent in 2011, with the slowing down of advanced economies affecting the prospects of the region’s export-oriented economies.
A bigger challenge in the year will be to maintain stability. Rising exposure to short-term capital flows of the region’s emerging economies owing to a massive injection of liquidity is leading to a build-up of asset bubbles in both capital and real estate markets. The stock market valuations in most emerging markets in the region are deeply linked with the movements of foreign institutional investor (FII) flows. Real estate markets have climbed new peaks in many countries in the region including in China. Besides stoking inflation, these inflows are also pressuring exchange rates in countries including Indonesia, Thailand and Malaysia. Therefore, a number of countries in the region like South Korea, Indonesia and Thailand have resorted to capital controls to moderate the volatility of capital flows.
Rising prices, especially of food, have been triggered by supply shocks in some countries like crop failures in Russia and Kazakhstan followed by export bans. The inflationary expectations resulting from supply shocks have been amplified by the speculative activity in the commodity futures against the background of massive increase in liquidity in the world economy. World food prices have already crossed the peak reached in 2008. This means a lot of hardship for the poorer and vulnerable sections of society and puts their nutritional security at risk. This, in turn, means policy makers in the region will have to walk a tightrope. In the process of controlling inflationary pressures through monetary and fiscal tightening, they may upset the recovery process adversely, especially in a weak external growth environment.
Apart from these short-term challenges, it is clear that despite recovery the demand for Asia-Pacific’s goods in the West will remain weak as they adjust with global imbalances by curbing credit-fuelled consumption. So the region has to develop new sources of aggregate demand to sustain its dynamism in the post-crisis world. The new engines include a rebalancing of the economies towards greater domestic and regional consumption.
How is India placed against these regional trends as it prepares for the new Budget? Firstly, in terms of growth outlook, the India growth story remains largely intact. UN-ESCAP projections suggest that GDP growth in 2010-11 would be about 8.7 per cent and is likely to be sustained through to 2011-12 at about the same rate if not better. This is because unlike many Asia-Pacific economies, India’s growth is largely driven by domestic consumption and investment, and is not so much affected by the slowing down of advanced countries.
This outlook is subject to downside risks and policy challenges. Increasing exposure to short-term flows is causing a lot of volatility in stock markets besides a pressure on the exchange rate. An appreciating exchange rate is not healthy for the Indian economy, especially in view of the already stretched current account deficit. It may be prudent to consider capital controls to moderate the inflows of short-term capital and focus on longer-term flows such as FDI, external commercial borrowings and IPOs abroad by Indian companies.
One of the most serious challenges facing the Indian economy arises from rising food prices. They affect poor and vulnerable sections of population disproportionately in view of their consumption basket largely comprising food. The food price inflation, therefore, can have serious implications for the poverty and hunger situation in the country. The challenge has to be met at different levels.
Lowering tariffs and taxes on food commodities besides monetary tightening is being tried. Regulating commodity futures especially of food commodities by imposing limits on positions may also help. Hopefully, the arrival of the new crop in a few weeks will curb inflationary expectations. Agriculture development should be paid greater attention in resource allocation to foster a new and more sustainable Green Revolution across the country for enhancing not only food security but also inclusiveness of the growth process.
The current emphasis on inclusive growth of the government will strengthen the Indian economy’s resilience to external shocks. As one of the largest and fastest-growing economies of the region, India has much to benefit from and contribute to the process of regional economic integration in Asia-Pacific. Trade and investment links with East Asian economies are deepening as a part of the farsighted Look East Policy. Hopefully, the deepening integration will help fulfill the vision of India’s leadership to create “an arc of advantage” in Asia.
The author is chief economist of UN-ESCAP, Bangkok
The views expressed are personal