IMF warns of overheating in Asia

New Delhi: Growth in Asian economies is expected to accelerate in 2012 but a fragile global economy could expose the continent to serious risks, the International Monetary Fund (IMF) said in its regional outlook for the Asia Pacific region released on Friday.

With the growth momentum picking up, Asian countries should be prepared to restart tightening monetary policy if overheating pressures become apparent, the fund said.

Economies in the Asian region are expected to grow at 6% in 2012, up marginally from 5.9% in 2011 but lower than 6.5% in 2013, according to IMF estimates. However, the fund warned that with the sovereign debt crisis in the euro zone yet to be fully resolved, and the possibility of a further escalation of the global financial turmoil, Asia remains vulnerable to external shocks.

“A sharp fall in exports to advanced economies and a reversal of foreign capital flows would severely impact activity in Asia, both directly and through knock-on effects on domestic demand. Moreover, a shock to commodity prices could create difficult trade-offs between inflationary pressures and budgetary risks from energy and food subsidies,” the IMF said in its report.

The challenge for Asia will be to adjust policies to support stable, non-inflationary growth, said Anoop Singh, head of the IMF’s Asia and Pacific department. “Calibrating the right amount of insurance to support stable, non-inflationary growth is the main near-term policy challenge,” Singh said. “Policymakers should be ready to shift gears and renew tightening if overheating pressures become evident.”

Some of the central banks in Asia, including the Indian central bank, have started reversing their tight monetary policy stance to support flagging growth. As part of efforts to revive growth, the Reserve Bank of India on 17 April announced a 50 basis points cut in key policy rates.

India’s gross domestic product (GDP) is expected to grow at 6.9% in 2012 and 7.3% in 2013, from 7.1% in 2011, according to recent IMF projections. The IMF estimates are substantially lower than the projected 7.6% GDP growth for 2012-13 by finance minister Pranab Mukherjee in his budget speech and 7.3% by RBI in its annual policy.

“In India, the lowered growth outlook in 2012 owes much to a slowdown of investment which partly reflects structural factors”, the report said. Concerns about governance and slow project approvals by the government have weakened business sentiment, adversely affecting investment along with cyclical factors such as global uncertainty and policy tightening, according to the report.

‘Improving the investment climate and infrastructure, and education, as well as facilitating trade and easing labour laws’ will help maximize gains from India’s ongoing demographic transition, the report said.

Economists said that RBI has indicated that it has kept all options open, including a reversal in the easing of the monetary policy. “If inflationary pressures crop up and inflation goes back to double-digit levels, we will see the RBI change course,” said Samiran Chakraborty, head of research in India at Standard Chartered Bank. “What the market is not sure of is that when the tightening will start. Whether it will be at an inflation level of 7.5% or 8.5%.”

IMF’s advice on overheating “may be more specifically targeted at other Asian economies which started easing their rates in 2011,” he said.

The IMF report also stressed the need for the Indian government to focus on fiscal consolidation to contain inflationary pressure and limiting non-priority spending, including fuel-related subsidies.

India’s inflation based on the wholesale price index slowed marginally to 6.89% in March, from 6.95% in February. But inflation in food items accelerated to 9.94% in March compared with 6.07% in February.

remya.n@livemint.com