Fears of slowdown in India & China economies (15 Jun 2011)

Fears of slowdown in India & China economies
By Lois Calderon | Posted: 15 June 2011 2348 hrs

SINGAPORE : Efforts to combat simmering inflation in India and China have stoked fears of a slowdown in the world's economic powerhouses.

International Monetary Fund's former economist, Raghuram Rajan, said the impact could be softer for India if it makes the right policy mix.

He said China, meanwhile, could avert a hard landing.

Raghuram Rajan accurately predicted in 2005 that a financial crisis will unfold once banks lost confidence in each other.

Six years after the global economy has recovered from that crisis, the former IMF chief economist said the world's major engines of economic growth are headed for a slump.

How deep the landing would be depends on how these economies deal with a common factor - inflation.

While India had taken decisive steps to mop up excess liquidity, its subsidies on food and fuel are still stoking inflation.

Mr Rajan said: "The problem in India is that the fiscal policy is not supportive of the contraction even as we have the RBI raising the interest rate.

"Let's talk about food security bill, which in a sense subsidises food to a significant part of the population - which (will) blow a further hole in the fiscal (policy) over and above what's being blown by subsidies to fuel.

"So I think the fiscal side has to (be consistent) with the monetary side for both to work in the same direction and to have probably a soft landing."

Meanwhile, he added that China's shift to consumption-driven growth will support its economy despite its aggressive tightening and credit controls.

He expects inflation in China to cool towards the end of the year, after rising to 5.5 per cent in May amid double-digit food inflation.

As to whether China is headed for a hard landing, Mr Rajan said: "Nothing is inevitable."

Investment banks like Nomura are still betting on China despite its gloomy earnings forecast.

Henry Wu, head of China equity research, Nomura, said: "I'll still be comfortable to buy into China because overall, the valuation is still about 11 times - even taking into account the potential earnings cut."

Analysts have recently scaled down their growth forecasts for the Chinese economy following disappointing data on industrial production and manufacturing.

- CNA/al

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[2101silverstein]

India is the biggest lemon being oversold to this world!