India’s economy faces inflationary pressure if it grows about eight per cent, said Ifzal Ali, chief economist of the Asian Development Bank on Wednesday. Many Asian countries were facing growth pains and how each country handled these pressures would determine their future economic prospects.
India had achieved a 'potential growth rate of eight per cent', said Ali, speaking at the Asia Society on the launch of the bank’s Asian Development Outlook 2007 report. “When growth goes past that figure, it causes problems.”
A key reason the consumer price index in India is in double digits, was severe capacity constraints in manufacturing that went beyond the country’s shoddy infrastructure. “It is noteworthy that inflation in the manufacturing sector is higher than inflation in agriculture,” Ali said. However, part of India’s inflation was sluggish agriculture.
India needed to raise its investment rate. Even more important, Ali said, was that the productivity of investment had to be increased and this, in turn, meant India had to further improve its business environment. “But second generation reforms will be much more difficult because of India’s political economy,” he said.
The need to improve productivity by bettering the present business environment, Ali said, was crucial to all of developing Asia. “The pace of growth in Asia is creating certain pressures. How Asian countries handles these pressures will determine how sustainable their growth will be.” Ali said that in the immediate and medium term, the key was to generate an environment that would induce firms to carry out “rapid increases in productivity.”
Many Asian economies needed to be rebalanced. If India had its inflationary headaches, China needed to cooldown fixed asset investments. China was moving from an economy driven by foreign investment and exports to one driven by domestic consumption. “This will take a long time to workout,” said the former IIM-Ahmedabad professor.
Asia was also looking at using foreign exchange reserves more constructively. He noted both the Indian and Chinese finance ministries had in recent times spoken of using foreign exchange reserves. India was trying to use the reserves to build infrastructure. China was contemplating a more “active management” of reserves in the way of Singapore.
Ali said the ADB remained “bullish” on Asian economy as a whole. “Despite all the hype about Asia, it is still at its infamy in terms of development.”