India, China to keep growing as global economy shrinks: IMF

April 22nd, 2009 - 9:40 pm ICT by IANS  

By Arun Kumar
Washington, April 22 (IANS) Emerging Asia led by China and India is expected to continue to grow even as the global economy is projected to shrink by 1.3 percent in 2009 in the most severe recession since World War II, according to the IMF.

China and India have also been affected by contraction in the export sector, but their economies have continued to grow because trade is a smaller share of the economy and policy measures have supported domestic activity, says the International Monetary Fund’s April World Economic Outlook (WEO) released Wednesday.

Emerging Asia is expected to continue to grow, led by China and India, with a modest recovery projected in 2010, underpinned by a pickup in global growth and a boost from expansionary fiscal and monetary policies, said the report released ahead of the global finance chiefs meeting here over the weekend.

With trade comprising a smaller share of the economy, India, like China, is less exposed to the decline in global demand. Nevertheless, its economy is still suffering from more difficult external financing for firms and banks, the IMF said.

Because India has less room to ease macroeconomic policies, growth is expected to decline sharply from more than 9 percent in 2007 to 4.5 percent in 2009.

The slowdown is primarily a result of weaker investment, reflecting tighter financing conditions and a turn in the domestic credit cycle, the IMF said.

In India, the policy rate and reserve requirements have been cut, and large liquidity injections have eased pressure in money markets; foreign exchange liquidity shortages have been alleviated by easing controls on capital inflows and introducing foreign exchange swaps for banks.

Policy rates remain high in real terms in India, and further rate cuts would help bolster credit growth, the IMF suggested.

Worldwide, while the rate of contraction should moderate from the second quarter of 2009, output per capita is projected to decline in countries representing three-quarters of the global economy. Growth is projected to re-emerge in 2010, but at 1.9 percent it would be sluggish relative to past recoveries.

Growth projections for Asia too have been marked down to varying degrees, in line with weaker global demand and tight external financial conditions and despite countercyclical macroeconomic policies.

Activity in advanced Asia is expected to drop sharply, and some economies could even experience deflation, WEO said.

The risks to the outlook for the region remain tilted squarely to the downside, the WEO said. A key concern is that a deeper or longer recession in advanced economies outside Asia will reduce external demand even further, with negative repercussions for exports, investment, and growth.

In addition, further deterioration in global financial conditions may additionally tighten to virtually zero, increased liquidity provision, broadened the range of eligible collateral, and started purchasing commercial paper and bonds to ease corporate funding pressures.

Most economies in Asia have already implemented expansionary fiscal policies with the most ambitious plans announced in China and Japan, the IMF said.

Nonetheless, there is scope to do more to bolster domestic demand in a number of economies that have fiscal room, it said.

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