Till now, India had been singled out as inflation-afflicted among Asian emerging economies. Besides China, Indonesia, Vietnam and other south-east Asian countries are also in the grip of inflationary pressures at varying levels. Revival of growth and demand in countries like China and USA has sparked the rise in crude prices from the 80-85 dollar a barrel range to 95 dollars in the last week of December Market analysts expect oil prices to cross 100 dollars, given OPEC’s reluctance to boost supplies to meet demand. Non-oil commodity prices have also been on uptrend because of poor harvests as in Russia in case of wheat and growing demand for industrial raw materials such as cotton, minerals and metals.

The first decade of the 21st century now closing saw China’s rise as a major global player, overtaking Japan as the world’s second largest economy, with its growth roaring at near double-digit. India’s growth also climbed to 9 per cent for three years in mid-decade before the onset of the global financial and economic crisis, the worst since the Great Depression of 1930s. But India, as many other Asian economies, were resilient to tide over the negative fall-out from the crisis and bounce back to near normal growth.

China and India growing at an estimated 10 and 8.5 per cent respectively in 2010 continued to help drive world growth at a time of fragile recovery in the major developed economies, USA, EU and Japan. Asia remains the most vibrant economic region at present. But a mix of factors like economies operating to capacity, excessive liquidity from loose monetary policies and surge in capital flows, build-up of asset bubbles has fuelled inflationary pressures for countries across much of Asia.

China decided to act once the CPI crossed 4 per cent in October, above the official target of 3 per cent, and effected a second rate increase on December 25 as CPI had soared to a 28-month high of 5.1 per cent in November. Banks are now required to maintain a reserve ratio of `18.5 per cent (19 per cent for the largest banks) while one-year lending and deposit rates now stand at 5.81 and 2.75 per cent respectively.

China could sustain its high growth despite the global recession and trade contraction because of its massive stimulus in late 2008 (around 600 billion dollars) for a two-year period and its “moderately loose” monetary policy which led to excessive lending by banks, especially for the property sector, and over-heating of the economy. The liquidity overhang is also partly attributed to external surpluses that China managed to build up even during the crisis.

Top Communist leadership at the annual economic policy conference set combating inflation and stabilizing growth without overheating as the major economic policy task in 2011, first year of China’s 12th five-year plan. There was also a call on authorities at all levels to do everything possible to ensure “the security of the supply of major agricultural products”, in view of spreading civil unrest over food prices and social disabilities.

While China shifts from “moderately loose” to “prudent” policy stance, China has said the challenge in the near future is to normalize money supply situation with a range of tools like open market operations, rate rise and reserve requirements. Governor of the central bank, Mr Zhou Xiaochuan has also indicated that China would gradually promote liberalisation of interest rates during the next five years. A return to sound monetary policy would be conducive to strengthening management of inflation expectations and preventing asset price bubbles, according to bank officials. Other ideas floated include the dropping of fixing yearly quota for total volume of lending, the central bank setting only a national lending target, and the banks being allowed to determine lending and deposit rates as dictated by market conditions. But all these would be gradual steps over the next five years.

Chinese authorities had early in December announced price controls and other measures to augment supplies of foodgrains and other edible articles at lower prices and local authorities extending subsidy to needy families. Wages have gone up for both urban and rural households and this is one of the factors cited for food price inflation. China’s Premier Wen Jiabao assured the people in a radio address on Sunday that Government with the administrative and monetary measures being taken would be able to control the overall level of prices. Chinese authorities concede that reform of the exchange rate mechanism would help to contain price rise but official policy is to keep the exchange rate “basically stable at reasonable level”.

In India, WPI had moderated to 7.48 per cent in November but prices for “ primary articles” stood at 15.35 per cent while food articles continued to be in double digit 12.13 per cent during the week ended December 1. These indices have been rising in double digit in the current fiscal year. With India importing 80 per cent of its oil requirements, the elevated international prices, with those of other essential imports like metals, would not only add to inflationary pressures but would also widen the trade and current deficit, the latter moving close to 4 per cent of GDP, the highest in over a decade.

In the absence of credible actions to raise food production and augment supplies in the economy, there will be continued reliance on monetary measures. For most of 2010, the Reserve Bank of India’s monetary policy had focused on containing inflation and anchoring inflationary expectations, raising the policy lending rate by 150 basis points, and ensuring liquidity for productive requirements of the economy. The challenge of calibrating monetary policy to maintain higher level of economic activity as well as containing inflation will continue in 2011, as the outlook at present suggests.

Growth performance for both China and India and in the Asian region will moderate after the rise in 2010, according to most forecasts from international agencies. Developing countries output growth is expected to moderate to 6 per cent on average during 2011-12 while for Asia, growth would be down from 8.6 per cent this year to 7.1 per cent in 2011, according to ADB. Growth in South Asia in 2010 was 7.8 per cent, the solid recovery led by India growing at 8.5 per cent with better performance of agriculture as well as double-digit growth in manufacturing.(IPA Service)