The International Monetary Fund in its latest World Economic Outlook report (WEO) 2011 expects China’s economic growth to remain robust at 9.6 percent this year and 9.5 percent in 2012, while growth in India is expected to moderate, but remain above trend, with GDP growth projected at 8.25 percent in 2011 and 7.75 percent in 2012. In toto, the world output is projected to rise by 4.4 percent this year, while emerging and developing economies will grow at a much higher 6.5 percent, according to the IMF. The economic drivers for this stage of growth are expected to be the private sectors.
While the developing economies of China and India are expected to carry a majority of the burden of global economic growth on their backs, IMF economists are already weary of high inflationary pressures overheating both economies. “The challenge for many emerging and some developing economies is to ensure that present boom-like conditions do not develop into overheating over the coming year,” the IMF report said. While China recently raised interest rates, India is expected to follow suit in May. Analysts have already predicted further rate hikes later in the year as both economies grapple with social insecurity and rising prices of everything from food to mobile phones.
India’s Wholesale Price Index-based inflation stood at 8.31 percent in February, which is still higher than the RBI’s target of 8 percent by March. Similarly, China’s consumer price index is expected to hit 5 percent this month, way above the controllable 3 percent hoped and planned for by Beijing. In addition, India’s infrastructure and red tape woes coupled with the under played yuan are not helping either government reign in prices. Realizing this, the IMF said a stronger currency and higher interest rates would help emerging economies such as China and India avoid overheating and ease global trade imbalances, which, it added, was “essential” to putting the recovery on a stronger footing.
Inflation caused by huge money flows into these highly developing economies is also now gradually having its effect on the manufacturing and services sectors. The costs of raw materials have gone up, as have labour charges, leading to an upward spiral in costs of everything from pins to planes. As a result of runaway prices, factories have started moving from China to less expensive locales, such as India, Vietnam and Indonesia. India’s industrial output has fallen this month and is only expected to to rise with the onset of the monsoons.