Predicting an 8.8 percent growth for India this year, the International Monetary Fund (IMF) says strong domestic demand will support the recovery in both India and China as the total world output goes up by 4.2 percent.
In projecting India's growth of 8.8 percent in 2010, 3.1 percentage points more than the 5.7 percent growth in 2009, and 8.4 percent in 2011, the IMF has in the April 2010 World Economic Outlook (WEO) raised its own estimates in January by 1.1 points for 2010 and 0.6 points for 2011.
In China, GDP growth exceeded the government's 8 percent target in 2009 and is expected to be close to 10 percent in both 2010 and 2011, it said reflecting little change from January.
In projecting a 4.2 percent growth in world output in 2010 and 4.3 percent in 2011 after a negative 0.6 percent growth in 2009, the WEO has raised its January estimates for 2010 by a marginally higher 0.3 points without any change for 2011.
The strength in final domestic demand in India and especially China is expected to have positive spill-overs for other Asian economies, said the report released ahead of meetings this week between the fund and the finance ministers of the G20 group of leading economies, including India.
"For economies such as India, which are relatively more closed and which have relied on stimulus to support growth, the main challenge will be to ensure durable fiscal consolidation, including by implementing fiscal and other structural reforms."
The IMF also suggested that it "may not be too early to start unwinding the stimulus if output gaps are closing and inflation pressures are beginning to emerge.
"This appears to be the case already for a few economies in the region, including Australia, India, and Malaysia, where authorities have already started tightening monetary policy," the WEO noted.
For economies where excessively large surpluses contribute to global imbalances, slowing the effects of inflows on credit growth by allowing more exchange rate flexibility would help address both problems, it said.
Other potential policy responses include strengthening macro-prudential measures, tightening fiscal policy, and, if still needed, some form of capital controls, IMF sad.
Painting a more positive picture for emerging economies, the agency said:
"Inventory investment is likely to make a significant contribution to growth in the short term, on account of prospects for improved demand in both advanced and emerging economies."
With global trade rebounding, stocks must be rebuilt after the drawdown of 2008-09, just as in the advanced economies, it said.
Furthermore, countries such as Brazil, China, India, and Indonesia are already sustaining a strong rebound, even in the face of weak recovery in the advanced economies, quickly re-attracting capital flows.
"This is because most emerging and developing economies did not suffer long-lasting shocks to their financial systems or large increases in unemployment rates, and many have been able to deploy sizable fiscal and monetary stimulus."
This reflects a widespread strengthening of policy frameworks and institutions in response to earlier crises as well as accelerating potential growth, driven by market-oriented reforms, it said.
"Historically, sound domestic policies and strong underlying potential have provided a number of emerging and developing economies with some insulation against recessions in advanced economies," the IMF noted.