While inflation is broadening in Asia, it is “stubborn” in India, well above the central bank’s stated objective, though CPI had come down from 16 to 10 per cent during 2010, helped by less food price inflation. But inflation, most evident in India, has become more generalised and is projected to remain high—averaging 7.5 this year before perhaps moderating to 6.9 per cent in 2012.

IMF’s revised estimate of GDP for 2010 is 10.4 per cent (higher than 10.3 per cent for China), but growth is projected to moderate to 8.2 per cent in 2011 and further to 7.8 per cent in 2012. Infrastructure will remain key contributor to growth and corporate investment is expected to accelerate as capacity constraints start to bind and funding conditions remain supportive, according to WEO.

China’s growth for the two years is estimated at 9.6 and 9.5 per cent respectively. Adhering to IMF’s gentle nudging, the WEO suggests to countries like China to read the signs of inflation and property bubble and not remain hesitant about allowing the exchange rate to appreciate. With China now holding close to three trillion dollars of reserves, pressure for renminbi appreciation to help reduce global imbalances would grow.

Meanwhile, China has run its first trade deficit in seven years with the first quarter of 2011 ending with 1.02 billion dollars, as against surplus of 13.9 billion in corresponding quarter of last year, With imports becoming cheaper and strong domestic demand and higher commodity prices adding to inflationary pressures, China watchers see greater need for faster appreciation of its currency.

IMF’s estimates (in purchasing power parity terms) are for world output to grow at 4.5 per cent this year and next (after 5 per cent in 2010), advanced economies at 2.5 per cent and emerging economies and other developing countries at 6.5 per cent over this period. Developing Asia is expected to clock an average 8.4 per cent in 2011 and 2012. (Global output in market-based exchange rates such as the World Bank adopts would be 3.5 per cent in 2011 and 3.7 per cent in 2012). World trade growth is likely at 7.4 and 6.9 per cent in 2011 and 2012.

The major risks, highlighted in the IMF’s World Economic Outlook, timed for the spring Fund-Bank meetings of Finance Ministers (April 15-16), are oil prices and capital flows. Oil prices are likely to remain high for the foreseeable future, and it does not rule out, given the social and economic conditions in Middle East and North Africa, prices peaking 150 dollars a barrel. Based on futures market trends, it has assumed 108 dollars as benchmark for its global growth projections.

In overall terms, IMF sees improvement in financial markets, buoyant activity in many emerging and other developing countries, and growing confidence in advanced economies, and thus economic prospects for 2011 and 2012 are “good”, notwithstanding price volatilities and fears about disruption of oil supply. Its assumption of 108 dollars for growth projections is 35 is 35 per cent above last year level. While no impact on global growth is expected in the short term, IMF says, persistent adverse oil supply shocks would imply lower global output, higher revenues for oil exporters, surge in capital flows and widening of current account imbalances.

Inflation and the continuing surge in oil prices is already of concern to the Finance Ministry as it could widen the fiscal deficit affecting planned fiscal consolidation, and the current account deficit, apart from its impact on the 9 per cent growth rate assumed in the budget for 2011/12. According to IMF, consumer prices could moderate from 13.2 per cent in 2010 to 7.5 per cent in 2011 and 6.9 per cent in 2012 – which means above RBI’s comfort zone for the near term. More worrisome could be a higher current deficit projected at 3.7 and 3.8 per cent of GDP for this and next year.

IMF also refers to “credit booms” in emerging economies of which the signs are accelerating inflation and rapid increase in property prices. In India, it notes, credit growth had begun to increase to pre-crisis level (2007). From a five-year perspective, per capita rate of credit growth has been very buoyant with much flowing into real estate and large infrastructure projects. Credit growth has remained high in China and real estate prices are rising at double digit rates.

However, developing Asia as a whole is projected to continue expanding rapidly, though export growth is expected to moderate. The challenge for many emerging and some developing economies is to ensure that present boom-like conditions do not develop into overheating. Inflation pressures are likely to build further as growing production comes up against capacity constraints, with large food and energy price increases heavily weighing on consumers and motivating demands for higher wages. Real interest rates in these economies are still low and depending on cyclical and external conditions, a tightening of macroeconomic policies is needed in many emerging market economies, it adds.

On capital flows, IMF points out with recovery gaining (especially in USA and certain other advanced economies), as policy rates there rise from their unusually low levels, volatile flows may again exit the emerging market economies Capital flows recovery has been led so far by portfolio and bank flows, with a falling share of foreign direct investment inflows. These developments may raise the risk of future instability. Possibility of policy rate hikes in advanced economies in the face of emergence of inflation may already be acting as a brake on such flows, besides heightened geopolitical uncertainty. But, IMF urges emerging market economies not to delay additional policy tightening until the advanced economies undertake such tightening themselves.

The European Central Bank has after two and a half years raised its key policy rate from 1 to 1.25 per cent though it has indicated the situation does not warrant further hike at this stage. More than monetary policy which could remain accommodative for some more time given the pace of recovery and unemployment, IMF harps on fiscal consolidation plans and entitlement reforms supported by stronger fiscal rules and institutions, it regards especially urgent in USA “to stem the risk of globally destabilizing changes in bond markets.”

IMF has qualitatively shifted its stance toward greater efforts at reducing deficits in USA and indirectly is also supportive of the current Congressional (Republican) attempts to cut discretionary spending. After a prolonged battle, a compromise was struck on April 9 with the White House, with substantial spending cut in the 2011 budget, to avoid a Federal shutdown. IMF maintains that in order to make a sizable dent in the projected medium-term deficits, broader measures such as Social Security and tax reforms would be essential (on the lines of the recommendations of the Fiscal Commission which President Obama had appointed last year). IMF also sees no need for another round of “quantitative easing” i.e. Fed’s purchase of Treasury securities to support economic recovery. (IPA Service)