By Arun Kumar, IANS
Washington : India and China both represent remarkable success stories but they also face a number of difficult challenges ahead to sustain their performance, International Monetary Fund (IMF) officials say.
“One can be optimistic about China and India,” representing as they do “remarkable success stories,” said David Burton, Director of IMF’s Asia and Pacific Department, Friday at a briefing on IMF Asia and Pacific Regional Economic Outlook.
Noting that increase in India’s growth to high levels is more recent than China’s, but nonetheless impressive, he said India faces a number of challenges including a high public debt and some inflation pressures, although the authorities taken steps to tighten monetary policy and those appear to have been reasonably effective so far.
China and India are so crucial to driving economic growth at the moment as they’re both large economies and they’re both growing very fast, Burton said, noting that “India, too, though it’s historically been more closed than China, has been opening up.”
And India is having a greater impact than it used to through trade channels, although it remains somewhat less open than China. There’s a range of structural reforms that India needs to undertake to further deregulate and open its economy so that it can have more broad-based growth, he added.
It needs to do so particularly in the manufacturing sector to drive growth and to drive the employment creation that it will need, particularly with its relatively young population and the need to provide jobs for new entrants to the labour force, Burton suggested.
With consultations about to begin on India, its exchange rate policy along with many other policies, including in the financial sector will be an important focus, as it is with all countries, he said.
“But I would note that the exchange rate in India has been increasingly flexible in recent times. In fact, it’s appreciated a lot against the dollar, and indeed, in effective terms, in recent weeks. So India has certainly moved quite a long ways towards having a pretty flexible exchange rate policy.”
While China and India do account for a lot of growth, the initial impetus to growth still comes very much from domestic demand in the rest of the world and not domestic demand generated independently in Asia.
Noting that not only in China and India, but in Asia generally, inequality has been rising, Burton said there is a range of policies that can be implemented to help ensure that the benefits of growth are more evenly spread.
“But it’s certainly true that they (the benefits) haven’t been evenly spread in recent years, and that it’s an important issue that the region needs to worry about.”
Asked if there was a general apprehension that some provinces may be left behind with the “runaway economic growth in India and China”, Burton said: “It is important to make sure that that doesn’t happen”.
In India, for example, states have some autonomy in the policies that they follow, and it’s up to individual states too to make sure that they follow policies that are conducive to growth and that they don’t get left behind, he noted.
In the case of China a major challenge is to rebalance economic growth, Burton said, pointing out that right now China is very heavily dependent on both net exports and investment.
With China becoming a very open economy on the trade side, it’s very much engaged with the rest of the world and the rest of the region. “And that means that its economic performance has an important impact on global economic growth,” he said.
The IMF regional outlook sees developments in Asia as generally positive this year. Growth has continued to accelerate, led by China and India, while domestic demand has played an increasing role in some economies, particularly the Newly Industrial Economies and the Association of South-East Asian Nations.
Asia was not at the epicentre of the recent global financial market turmoil and markets and financial institutions in the region have generally held up well as direct exposure to the US sub-prime mortgages and, more broadly, to leveraged and complex structured credit products appears to be small, including for hedge funds in the region.
The outlook is for growth to moderate during the remainder of 2007 and 2008. “Our latest forecast is for growth in Asia as a whole to decline from about eight percent this year to 7.2 percent next year, and in emerging Asia from about 9.5 percent to 8.5 percent — as external demand, especially from the United States and Europe, slows,” Burton said.
The sub-prime crisis, however, has increased uncertainty about the outlook for the global economy and for emerging Asia in particular. A further bout of global financial volatility could have significant spillovers on the region, including a potential reversal of capital inflows.
The main risk, though, is of a sharper slowdown in the United States and other advanced economies than in the baseline scenario, and correspondingly slower export demand growth for Asia.
There are also possibilities on the upside, though, mainly in China and India, where investment could be stronger than currently envisaged, Burton said.