Since 2007, public debt of advanced economies would have soared by 40 percentage points to 110 per cent by 2014, according to IMF estimates, as the combined effect of extraordinary fiscal and monetary measures taken to combat recession. US will continue to run Federal deficits close to a trillion for a decade, on present indications, which rules out the largest economy returning to its historic role of the prime engine of world growth. With an unemployment rate close to ten per cent - some eight million jobs lost in the longest recession - America can no longer absorb imports from the rest of the world on pre-crisis scale through debt-fuelled consumption and running trade deficits of the order of half a trillion dollars on average.

Overall, conditions are less promising for developing countries dependent on aid flows and trade as well as for emerging economies like India to link their own high growth ambitions to strength of global recovery while stability of the international financial system, shaken to its foundations in 2008, cannot yet be taken for granted. The next few years, in effect the first half of the current decade, would be the period of recovery and restructuring of global economies based on “strong, sustainable and balanced growth” and the emergence of a well-regulated international financial architecture. Thus, growth in emerging economies would have to be fuelled more by domestic consumption.

Against this somber background, ADB in its 2010 Development Outlook Report envisages strong recovery in Asian region to 7.5 per cent this year but with risks like inflation (India), asset price bubbles (China) and slower global recovery. The surge incommodity prices, especially oil which is again volatile, and the persistence of global Imbalances could derail developing Asia's growth momentum. In addition, the Report notes, the region's stronger recovery and higher interest rates relative to those in the major industrial countries are already attracting potentially volatile capital flows, complicating macroeconomic management. .

ADB has projected India's growth at 8.2 and 8.7 per cent in 2010 and 2011. India's early exit from the global crisis was due to prompt and strong fiscal stimulus and monetary easing and some improvement in global economic environment.

A return of risk appetite and large capital inflows helped in the bounce-back. In the context of rising inflation, especially food prices which disproportionately impact the poor, ADB notes, monetary tightening and withdrawal of fiscal stimulus are already under way. The outlook for a return of high growth would require continued “apt handling'' of macroeconomic policies. For sustained long-term growth, addressing infrastructure bottlenecks and reforming agriculture are essential, ADB report said.

ADB growth forecasts are based on some key assumptions such as gradual withdrawal of monetary and fiscal stimuli over the next 2 years; comfortable domestic food supply position with normal monsoons, modest recovery in industrial economies and world trade resuming growth at 7 to 8 per cent. Oil prices have been moving up on the back of a rising demand especially in China and India and Brazil. (Oil had peaked to 87 dollars a barrel in the second week of April).This may become a complicating factor for all economies.

ADB suggests that disciplined monetary policy must go hand in hand with adequate financial regulation to prevent asset bubbles. Regardless of the specific institutional arrangements, there must be better coordination between the two. Secondly, growth rebalancing would benefit substantially if measures to remove structural impediments against domestic demand were accompanied by more flexible exchange rates. .

ADB welcomes the Parikh Committee's recommendation for complete deregulation of petrol (gasoline) and diesel prices, and substantial increases in the prices of cooking gas and kerosene. Though a much-needed reform because of high subsidy costs which would also harm the long-term health of the petroleum industry, the report acknowledges its Implementation would be challenging at a time of accelerating inflation and higher budget levies on crude oil, petrol, and diesel that were passed on by adjustments in administered sale prices.

Generally, ADB says, price stability must remain the overarching objective of monetary policy. The region needs to continue with sound and responsible fiscal and monetary policies in view of volatile capital flows with serious implications for exchange rates and money supply and growth triggering accelerated increase in consumer and asset prices. By raising key lending and borrowing rates in the latter half of March, the report noted, RBI has signaled its determination to move toward a more neutral stance for monetary policy.

For China, ADB has projected growth at 9.6 per cent in 2010, propelled by the ongoing support of huge fiscal and monetary, but it would ease to 9.1% in 2011 as the government tightens the expansionary policies. At the same time, signs of rising inflation, higher asset prices, and returning foreign capital flows, will see the government adopt a more cautious approach, with the pace of bank loan expansion for public investments to be pared back.

ADB assumes that the WPI inflation in India which was 10 per cent by February would ease in the coming months and estimates annual inflation in 2010 at 5.0%, rising to 5.5% in 2011. To counter the trend in rising food prices and strengthen agricultural output, which declined in 2009, the report said, measures required included boosting farmgate prices, and addressing distribution, trade, research, and subsidy constraints. More government spending on infrastructure is also needed, which may require a tightening of subsidies as part of fiscal consolidation. Governments targeted fiscal deficit reduction over the next two years is taken note of in ADB report.

On Asian currencies, ADB has called on governments in the region to allow more exchange rate flexibility and to refrain from intervening heavily in the currency markets to keep their currencies less volatile and, in many cases, artificially weak. Misalignment in the form of undervalued currencies is evident in many developing Asian economies, reflecting significant intervention in the foreign exchange market, the bank said. It cited research indicating that a number of currencies led by China were more than 20 per cent undervalued against the US dollar. Only the currencies of South Korea, Indonesia and India are slightly overvalued against the dollar, it said. (IPA Service)