India to grow at a robust 8% but inflation a concern, says report

India to grow at a robust 8% but inflation a concern, says report
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First Published: Wed, Apr 02 2008. 10 44 PM IST

Updated: Wed, Apr 02 2008. 10 44 PM IST
New Delhi: The fallout of the US sub-prime mortgage crisis notwithstanding, India and other Asian countries will continue to grow at current rates, though growing inflationary pressures could harry their economies, the Asian Development Bank, or ADB, has said in a report.
It also made a case for inclusive growth, more open immigration regimes that allow for movement of skilled personnel, and social programmes directed at the unemployed, to soften the impact of any economic shocks.
Although growth in developing countries in Asia, especially India, will taper off from 8.7% in 2007, its highest in two decades, the region will neither be immune to the global slowdown nor hostage to it, says the Asian Development Outlook, or ADO, put out every year by the bank that has “workers in Asia” as its theme this time round.
India will grow at a robust 8% in 2008, and Asian countries at 7.6%, but inflation could cross 5%, its highest level in a decade, triggering higher food and fuel subsidies, and straining the fiscal balance of governments, the outlook says.
Growth will rebound to 8.5% in India in 2009, Ifzal Ali, chief economist of the ADB, said over phone from Hong Kong, while inflation will climb to 5%, from 4.5% in 2008.
But “the process, over the next two years, will hinge on the timing and scope for relaxing monetary policy, and a resultant pickup in consumer demand. The economy still has a lot of momentum. Inclusive and efficient growth will ensure India and Asia’s sustained progress”.
“We did not find any evidence of Asia’s decoupling from the G3 (US, European Union and Japan),” he said.
A bigger risk lies in rising commodity prices and speeding inflation, and governments, ADO advises, should not allow inflationary expectations to become ingrained via higher food and fuel subsidies, as that would damage productivity growth over the longer term.
Tackling inflation may mean a more flexible exchange rate, or a scrutiny of fiscal spending and priorities, or even, targeted measures to ease supply pressures, or a combination of all in Asia, he said.
Referring to India, Ali said the current spate of administrative measures could result in distortions. “We have to bear in mind that inflation is not sudden and ‘imported’ but a culmination of various structural and cyclical forces over four-five years. Mainly, the breakneck speed of growth, which has led to structural imbalances, such as shortage of infrastructure and neglect of agriculture, the systematic buildup of reserves that has seeped into the money supply, and the lack of fuel price pass-throughs.”
Therefore, Ali said, “The first order of business would be to acknowledge that inflation is here to stay and not give in to short-term electoral considerations, especially since the fiscal situation is completely out of whack because of the various contingent liabilities.”
Indonesia, which raised fuel prices by 126% and compensated for it by giving very targeted cash subsidies, offers a good example, he said.
Saumitra Chaudhuri, member of the prime minister’s economic advisory council, conceded that “inflation will indeed be very high this year, as we had forecast”, but added that “every country will have to find its own way to tackle such sensitive issues”.
The outlook has also concluded that the G3 downturn shocks could be transmitted to Asia through trade channels.
Since market penetration by Asian suppliers in China, which will be the most affected, is limited, and since China itself will still grow strongly at 10%, this will provide a limited cushion against the downturn.
Asia’s financial systems are likely to be spared a credit crunch, with well-capitalized banks and their healthy balance sheets, but there may be some tightening, the report says.
ADO also focuses on education, skill development, and migration in Asia, to suggest how Asia’s huge and young workforce could participate more in growth.
It estimates, from labour survey data from India, Indonesia, the Philippines, and Thailand, that uneducated and low-experienced youth are the most vulnerable to high unemployment, informality, and low pay.
Since the region “does not have enough accountants, doctors, pilots and other highly trained workers to meet burgeoning demands”, ADO asks countries to liberalize immigration policies and open up to skilled foreign workers, as lack of such policies causes enormous economic losses, more than trade restrictions.
“In the long run, successfully overcoming skills shortages will require wholesale liberalization and reform of Asia’s tertiary education systems.”
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First Published: Wed, Apr 02 2008. 10 44 PM IST