With fiscal stimulus under withdrawal, consumption spending, aided by recovery in farm incomes, and “robust” business investment are expected to be the main sources of growth, which is projected at 8.2 and 8.5 per cent for the next two fiscal years. Inflation has moderated from its peak, mainly due to recovery in the agricultural sector, and this trend is likely to continue in the near term.

But with strong domestic demand and widening of the current account deficits, “a steadfast commitment to timely fiscal consolidation and further moves to normalise the stance of monetary policy will be important for ensuring balanced growth ahead”, the Outlook said. At the same time, there are risks to stability from the rise in international commodity prices, especially for energy-related products, and from large and volatile short-term capital flows attracted by relatively favourable economic and financial conditions.

The 13th Finance Commission recommendations provide a sound roadmap for medium-term fiscal consolidation. With strong broad-based growth set to continue to underpin buoyant revenue intakes, the OECD projection assumes a total reduction in the deficit in the order of 1.5 per cent of GDP over 2011 and 2012. Ideally, savings should focus on a greater rationalisation of expenditures, especially fertilizer and fuel subsidies, it said.

High inflation, driven by double-digit food prices, has been a major source of concern but the normal monsoon and agricultural recovery has helped to lower WPI to 8.2 per cent and CPI to 9.8 per cent in September. OECD, however, said with the strong growth momentum and the likely negligible spare capacity in the economy, “additional incremental tightening” by RBI seems to be warranted

In China, growth is on track to exceed 10 percent but the economy has already come to experience over-heating pressures with the rise in property prices, necessitating recent central bank's intervention with an interest rate hike (after a long interval) and rise in reserve ratio to bring down excessive liquidity and contain credit expansion.

Within days of these measures, the authorities are faced with a flare-up in food and energy prices, the CPI having not only exceeded the targeted 3 per cent but rising to 4.4 per cent in October, the highest in 25 months. Being a sensitive area which can trigger social unrest on a large scale, Government swiftly announced on November 17 a package of measures to augment supplies of grain, sugar, edible oil and diesel to reach the consumers. Subsidies would be offered to families in need.

The two leading Asian economies will enter 2011 amid global uncertainties, especially the “weak and uneven” post-recession recovery in USA and EU, the sovereign debt crisis in some euro-zone countries and the housing sector weaknesses in USA. However, OECD expects a “gradual strengthening” in major advanced economies in 2011 with USA and EU growing by 3.1 and 2.0 per cent respectively in 2012 when US unemployment could come down to 8.7 per cent from the present 9.7 per cent.

G-20 had set 2011 for advanced countries, in particular, to exit fiscal stimulus and begin consolidation, given their high deficit and debt levels. This is essential to stabilize expectations and strengthen confidence, OECD says. Global imbalances - a principal factor in the global economic crisis - remain and “widening” and there are rising concerns over protracted monetary accommodation spurring large capital flows to emerging market economies. The resulting exchange rate appreciations risk triggering protectionist moves.

Fiscal consolidation and structural policies can work together to reduce the size of global imbalances, according to OECD. Japan, Germany and China are referred to as countries which could through product and financial market reforms and higher social spending (China) could help to accelerate the process. OECD Secretary General Angel Gurria urges both advanced and emerging economies not to resist exchange rate changes consistent with international rebalancing.

In the case of China, OECD says, although the current account surplus is not projected to increase (as a ratio of GDP), further external adjustment will not be aided by the “weakening of the effective exchange rate” that has occurred despite a modest appreciation of the renminbi against the dollar in recent months.

The Outlook points out the effective exchange rate has depreciated by 6 per cent between mid-June and mid-October despite the decision of authorities to allow the currency to appreciate against the dollar by about 2.5 per cent and the subsequent 2.5 per cent appreciation against the bilateral dollar exchange rate.. The stability of the domestic economy would be enhanced if exchange rate policy were more oriented to allowing an appreciation against a basket of currencies.

China's growth in 2010 remains projected at 10.5 per cent in both IMF and OECD outlook report but is to moderate to 9.6 per cent in 2011. The World Bank's estimates are 10 per cent this year and 8.7 per cent in 2011. After rapid growth at 10.6 per cent in the first half of 2010, there was slowdown to 9.6 per cent in the third quarter but the economy is on course to record another double digit growth between 10 and 10.5 per cent.

OECD has projected the buoyancy to continue for the next two years at 9.7 per cent as faster domestic demand offsets a renewed slowdown in exports. But China's current account surplus is not coming down and would get stabilized at 5.5 to 6 per cent of GDP over the three years 2010-12. OECD estimates current account surplus to rise from 340 billion dollars in 2010 to 421 billion in 2012. The current surplus this year comprises 250 billion dollars in trade surplus and 90 billion in investment income. The two-way trade in 2010 (exports and imports) would total some 3.2 trillion dollars. China's reserves had already reached 2.65 trillion dollars by September 2010.

Although the stimulus plan is coming to an end, China's new initiatives are a social housing programme, an effort to improve health care facilities and the launch of the new (12th) Five-Year Plan (2011-15), which is likely to emphasise rapid urbanisation. Thus, OECD expects, private consumption demand to remain strong, with buoyant real incomes as labour markets tighten. Overall, domestic demand should accelerate in the projection period, while export growth moderates as the expansion of world trade eases back to trend, it said. (IPA Service)