However, US third quarter data cheered the market to push Dow Jones industrial index by 200 points on October 29. President Barack Obama noted recession was abating “but we have a long way to go to fully restore the economy”, and his benchmark for the economy, unlike in countries like India, is whether the growth is creating jobs. Analysts attributed the third quarter rise to the Federal stimulus package, the temporary rebate for auto purchases extended by the administration, and tax credit for first time home buyers. USA has been in recession from December 2007, as judged by the National Bureau of Economic Intelligence, which takes into account several indicators including GDP and employment. Eight million jobs have been lost in this recession with US unemployment rate now at 9.8 per cent, and set to grow further.

In its Regional Outlook for Asia and the Pacific, IMF has said the rapid Asian recovery is due to the comprehensive policy response - fiscal and monetary - in many countries and there should be no early exit as most of them do not face any immediate inflation threat. Major economies like India and China have large domestic market and relatively strong economic fundamentals like sound banking system and stable governance. For India, the return of capital flows, after a year of outflows, would help to maintain vigorous economic activity but its expectations of revival of export growth in the near future may prove optimistic.

China is the fastest growing economy with projections of 8.5 per cent this year and 9 per cent in 2010, with corresponding figures for India at 5.4 and 6.4 per cent, in the IMF outlook. Both countries suffered sharp export declines from October 2008, yet China managed to record a trade surplus of 135 billion dollars in the first nine months of 2009 when its foreign exchange reserves crossed the two trillion dollar mark (2.27 trillion dollars). The economy grew by 8.9 per cent in the third quarter raising the nine-month average to 7.7, close to the official target of 8 per cent. China's hectic pace is fuelled by its massive stimulus, mostly in infrastructure spending, and more particularly freeing its banking system from credit restraints. Financing for commercial real estate has been of an order as to trigger fears of asset bubble build-up, apart from raising bad debts.

Most Asian economies are export-dependent and IMF report warned that continued weak global demand would have a considerable impact on Asia's future growth. “Asia has boomed as America's consumption outpaced its income. If over the coming decade, US consumption slows markedly, the impact on Asia's growth could be sizeable,” it said. Two challenges are posed to policymakers in Asia. In the near term, they would need to manage a balancing act, providing support to economies until recovery is 'robust and self-sustaining”. At the same it should be ensured support is not maintained for so long that it ignites inflationary pressures or concerns about fiscal sustainability. They would need to assess the state of private demand and the extent to which it can substitute for a withdrawal of public sector demand.

Over the medium term, a greater challenge for emerging economies and other developing countries, according to IMF, is their adjusting to a changing global environment or “a new world” in which Asia's prospects would depend on instability to recalibrate the drivers of growth toward domestic consumption. A successful type of rebalancing would call for better social safety nets to reduce private precautionary savings, financial sector and corporate governance reforms to allow households to increase consumption and structural reforms to raise productivity and facilitate smooth reallocation of resources across the economy to make up for lower export growth momentum.

IMF concerned with global imbalances, in the context of growth rebalancing called for by G-20 itself, has also urged Asian countries to live with smaller current account surpluses and more flexible exchange rate management. This has been a recurring theme in the context of the substantial trade imbalance between USA and China. That situation may now be changing as US consumers are now tending to save in the same precautionary fashion as in Asia while the depreciating dollar is helping to boost US exports and reduce its current account deficit which is projected at 380 billion dollars in 2009 as against the annual 600-700 billion dollars in the current decade till 2008. EU will have smaller current deficits while Japan would have surplus. China's projected current surpluses are 350 billion dollars this year and of a similar order in 2010.

But major trading nations of Europe and Japan are worried over the declining US dollar which, while helping American recovery, is making their goods less price-competitive. The dollar has gone down 18 per cent against euro in the last 12 months and suffered an equally sharp drop vis-a-vis the yen. China's concern over fall in dollar value has to do more with its huge investments in US Treasury securities than in trade while its own currency movements, though no longer pegged to the dollar, are broadly in alignment with those of the dollar. The rupee appreciation also affects Indian exports to some extent.

India, though less dependent on exports, has suffered job losses in labour-intensive traded goods sectors, like textiles. In the first half of fiscal 2010,exports dipped to 78 billion dollars from 109 billion in the corresponding half (April-September) of 2008, down by 28 per cent, and Commerce Ministry counts on a reversal of the year-long decline in exports in the second half of the year (October-March). Neither exports nor inflation is of much immediate concern for the Finance Minister Mr Pranab Mukherjee who is now focussed on securing a 6.5 per cent growth, higher than the 6 per cent indicated by RBI which he thinks is pessimistic, by continuing with the fiscal stimulus for the present. Meanwhile, the wholesale price index is edging upwards, 1.51 per cent during the week ended October 17, but WPI inflation in the current fiscal year is already 5.95 per cent with food articles rising 14.05 per cent.

In its II quarter review, RBI has accommodated Finance Ministry concerns by not upsetting the current monetary stance in its essentials, despite “clear signs of rising inflation, stemming largely from the supply side” as Governor Subba Rao puts it, because private consumption demand in the economy has yet to pick up. As a precautionary measure, RBI tightened provisioning requirements on commercial real estate exposure. But given the inflationary pressures building up, it sees the need for a calibrated exit from the current policy framework. Whatever the supply side measures that Government would be taking, somewhat more seriously in the light of RBI statement, bringing inflation under control would become a challenge for policy-makers by the end of the year. An RBI intervention may thus become inevitable by the fourth quarter (January- March).

Understandably, the Finance Ministry is currently exercised more over ensuring that there are no over-runs in the budgeted expenditures and the fiscal deficit is held at projected 6.8 per cent of GDP. The recent moves on a couple of disinvestments before the end of the fiscal year, some duty rollback, savings from austerity drive and rejection of any hike in states' borrowing limits are all part of keeping the 2009-10 budget broadly on track. (IPA Service)