Asia plays a key role in this emerging shift of economic power with its two giants, China and India, setting the pace of advance, a factor underlined in two reports, from World Bank and Asian Development Bank, at the same time. ADB revises India's growth projection to 8.5 per cent in 2010 and 8.7 in 2011 and China's at 9.6 and 9.1 per cent respectively. A narrowing of margin between the two in 2011 is attributed to the phasing out of China's massive stimulus at the end of 2010 and industrial output getting subdued.

For India's ambitious policy-makers, ADB has drawn attention to high inflation and sharp appreciation of the rupee (11 per cent over a year) threatening to erode export competitiveness as well as plans to expand growth to 9 to 10 per cent in coming years. ADB raised its forecast for annual average inflation to 7.5 per cent in fiscal 2011, warning that high food prices remain a near-term concern.

While noting RBI's projection of overall inflation to moderate to 6 per cent by end-March 2011, ADB said, if price pressures do not abate as expected, the central bank will be hard pressed to intervene in the foreign exchange market to dampen rupee appreciation due to limited options for sterilization. Prolonged low interest rates in the major industrial economies could also speed up already high levels of short-term capital coming into the country, causing further tensions between inflation and the exchange rate. Other downside risks to growth forecasts are that recovery in industrial economies could stall or global credit markets could experience a fresh shock.

A resolution of several macroeconomic management and reform challenges is needed for India to return to the high growth plateau of recent years, according to ADB. These include maintaining export competitiveness by ensuring the right balance between the exchange rate and inflation, continuing the fiscal consolidation, improving agricultural productivity, addressing infrastructure bottlenecks, and sustaining investor confidence.

In the current year, a rise in industrial output supported by robust demand for consumer durables, a buoyant services sector, strong investment, and improving agricultural output with better monsoon, are underpinning better economic growth. But “persistent inflation mars the economic landscape”, ADB noted. High food inflation appeared to be seeping through to wages and then to prices for manufactured goods which had climbed to 6.4 per cent in April but eased to 4.8 per cent as monetary tightening gained traction. Food price inflation staying high at 14.6% in August, despite record levels of government food stocks was adding further to “popular discontent over continued high prices”. Revision in domestic prices of petroleum products, though welcome to reduce subsidies, also nudged up overall inflation.

The World Bank rates South Asia as one region that better withstood the global crisis and the first to return to the growth path from the global crisis. But it has also persisting poverty with some 600 million living on US$1.25 a day. The challenge for this sub-region is therefore to make recovery stronger, inclusive and sustainable. The priority is to reduce fiscal deficits and tame public debt accumulation in order to create fiscal space for social programs and critical infrastructure. Deepening trade integration will also be critical, it said.

South Asia is expected to grow around 7 per cent this year and nearly 8 per cent in 2011, better than the average 6.5 per cent in 2000-07 but economic growth is not enough to make significant gains in poverty. ADB puts South Asia's growth even higher at 7.7 per cent because of stronger domestic demand conditions and rising consumer and business confidence. It cites the surge in economic activity, especially in India. For flood-devastated Pakistan, growth will be down to 2.5 per cent in fiscal year ending June 11 with inflation surging to over 13 per cent.

Future growth outlook in South Asia is linked with several policy actions in each country. Generally, the World Bank says, policy makers need to create fiscal space to improve macroeconomic stability and finance infrastructure and social safety nets. Renewed attention to agricultural productivity growth is needed for the region to be able to manage inflationary pressures, particularly high food prices. The countries should also revisit trade and investment integration strategy within the region to take advantage of the global rebalancing underway. Four determinants of success in achieving faster and inclusive growth listed are - good governance, ability to transition out of conflicts, reaping the demographic transition and meeting basic requirements of urbanisation such as jobs, education, health and infrastructure.

Developing countries as a whole are expected to record 6.1 per cent growth in 2010, 5.9 percent in 2011, and 6.1 percent in 2012, while corresponding figures for high-income countries are 2.3 percent, 2.4 percent, and 2.6 percent. The Bank says such divergence in growth prospects will continue in the medium term. Better growth in developing countries than before is accounted for by faster technological learning, larger middle- classes, more South-South commercial integration, high commodity prices, and healthier balance sheets that allow borrowing for infrastructure investments.

Asian developing countries would together grow by a record 8.2 per cent this year, rising from 5.4 per cent in 2009, led by faster growth in China and India, according to ADB Outlook Update, which reported strong export recovery in the region, robust private demand and sustained effect of stimulus policies in the first half of the year. Inflation for the region, except India, is in comfort zone of 4 per cent on average.

Sustaining Developing Asia's growth would require policies to expand productivity capacity and rebalanced economic priorities. ADB urges China to consider fiscal policy adjustments and other measures to step up private consumption and promote a services-oriented economic model, complemented by other supportive policies. Disposable income of Chinese households should be raised and social safety nets strengthened by increasing the supply of low-income housing and boosting fiscal transfers to provinces.

Among Asian sub-regions, growth in East Asia is projected to rise to 8.6% in 2010, largely due to stronger than expected recoveries in the highly open economies there, apart from the exceptional performance of China. South East Asia's bigger economies - Indonesia, Malaysia, Philippines, Singapore, and Thailand - have also rebounded at a much stronger pace than earlier foreseen, given a sharp upturn in exports, which fueled recoveries in consumption and private investment. Aggregate growth for the 10 sub-regional economies (ASEAN) in 2010 is forecast at 7.4%.

Developing Asia has built a solid policy foundation that has served it well in its development. Yet looking ahead, the ADB report said, the region must reform its institutions and overcome critical structural impediments to unlock its long-term growth potential. (IPA Service)