There are mixed signals of performance of the economy in the first half of 2011-12 but these have not worsened the already revised outlook for growth “close to 8 per cent” in the current fiscal. Meanwhile, soaring food prices, in no way tamed, volatile crude prices and a steady rise in the across-the-board non-food inflation to 7.7 per cent till August, well above comfort zone, leave little option for the central bank to lower its guard. It needs to see some signs of overall inflation easing in the direction of RBI’s base line projection of 7 per cent by March 2012.

Intensifying global uncertainties would certainly have a bearing on the way the monetary policy is fine-tuned by RBI on October 25, as the economy has entered the second half of 2011-12 – a period hopefully looked for, for some moderation in the headline inflation, presently close to double digit. An orchestrated corporate campaign for RBI to hold its hand for the present may have had a silent nod from Government, which has no control over prices and also so far has not been able to contain fiscal expansion.

More administered price revisions are in the offing, especially for the power sector which is also experiencing coal supply bottlenecks. The mid-year policy statement of RBI is expected to address, apart from inflation in the main, policy issues in the financial sector (bank licensing, financial inclusion etc), and also ensure adequate liquidity in the system. RBI has to take a view on whether it is timely to make a possible reduction in the cash reserve ratio consistent with its monetary policy stance.

IMF’s Asian Regional Outlook, released on October 13, is supportive of the tightening stance of monetary authorities in countries with elevated inflation “where overheating pressure remains high and monetary conditions continue to be accommodative”. In such countries, it says, the ongoing return to “a more neutral monetary stance is appropriate” as a continuation of macro-policy normalization.

The Outlook has not revised IMF’s April growth forecast for China and India at 7.8 per cent and 7.5 per cent (India) and 9.5 and 9.0 per cent (China) for 2011 and 2012 respectively. Asia’s economic activity moderated from second quarter of 2011, partly from supply disruptions after Japan’s earthquake disaster in March and continued into the third quarter (July-September). But Asia’s domestic demand has proved generally resilient.

In India, IMF notes, core inflation (food and energy) has increased and fed through to generalized inflationary pressures. Net capital flows into emerging Asia have moderated so far in 2011 relative to 2010, following the sharp rise in global risk aversion, but remained strong in China and India. Private consumption remained robust in India on account of rising disposable income (including from high agricultural prices) but investment was subdued “partly on concerns over governance and the global outlook”.

For India,, where corporate funding relies increasingly on external commercial borrowing and equity finance, a severe fall in investment would curtail growth, IMF said. But the impact of weaker growth in advanced economies would be smaller for domestic-demand-based economies, such as China, India, and Indonesia, and larger for highly open economies that specialize in income-sensitive, high-tech consumer and investment goods such as Singapore, Korea and Taiwan.

The fundamentals for domestic demand in the Asian region remain strong and are expected to cushion the impact of weaker external demand on overall growth for the rest of 2011 and in 2012, the Outlook said. But for dynamic Asia, navigating the uncertain global environment— weakening of external demand and risks of spillovers from financial turbulence in the euro-zone –involves for the policy-makers “a delicate balancing act”, faced with both fears of contagion effects and “still high inflation in much of the region”.

An escalation of the euro area financial turbulence and a more severe slowdown than anticipated in the United States would have clear macroeconomic and financial spillovers to Asia.. While domestic demand remains strong, “Asia has clearly not “decoupled” from advanced economies.” .Against the backdrop of unusual uncertainty, a pause in tightening is warranted, particularly “in countries where inflation pressures have been contained and that are highly sensitive to a global slowdown,” according to the Outlook.

Growth in Asia has moderated since the second quarter of 2011, mainly reflecting a weakening of external demand. Domestic demand is still resilient, and it should continue to sustain activity across the region, contributing to relatively robust growth of 6.3 percent in 2011 and 6.7 percent in 2012 on average, slightly below its April forecast. Inflationary pressures in a number of Asian countries ”amid accommodative financial conditions should recede as food and energy prices gradually moderate”, after peaking in 2011, IMF said..

The Outlook has welcomed the successive measures Asian policymakers to normalize monetary and fiscal policy stances following the stimulus that was put in place in response to the global financial crisis. The emergence of renewed global downside risks pose challenges for Asian policy-makers who need “to balance growth considerations against inflation and balance sheet risks from prolonged easy financial conditions”. Fiscal policy consolidation is rightly continuing in many economies, it noted, as structural fiscal deficits are still above pre-crisis levels.

Although far from the epicenter of the crisis, given its high degree of integration, Asia remains vulnerable to further trade and financial shocks in a number of ways. In addition to a drop in global demand for Asian exports, IMF said, foreign investors could retrench from the region, reversing their large positions. European banks could reduce cross border lending, causing credit flows to dry up.

Nevertheless, given the financial, corporate, and public sector balance sheet strengths built over the last decade, Asia has buffers which should help navigate this global environment.

The region also has accumulated large foreign reserves. Many countries still have policy space to support economic activity in the event the downside risks materialize.

Calling for a shift in the growth model for Asia, in line with the G-20 objective on global rebalancing for strong and sustained growth, the Outlook says countries of Asia must now make further progress with economic rebalancing and develop stronger domestic engines of growth. In addition to structural reforms, this would require a reprioritization of fiscal spending, in order to create fiscal space for critical infrastructure investment and social priority expenditure. This formulation broadly accords with India’s current priorities.

IMF has also cautioned against the increasing income inequality in Asia despite fast growth and progress in poverty reduction over the last decade. The strategy is to reduce the share of vulnerable households through better social safety nets and more investment in health and education and other measures to help increase domestic demand over time, all of which would help to make growth more “inclusive”. (IPA Service)