ALTHOUGH economic growth in Asia is leading the world out of the worst recession in recent history, it needs to remain attentive to downside risks, states a press release from the International Monetary Fund, on the presentation of its Regional Economic Outlook for Asia.
According to the IMF, India is likely to maintain its strong growth momentum driven by robust domestic demand. Higher corporate profitability and favorable financing conditions in the country will support its private investment while its consumption growth will also remain strong on the back of better employment prospects and lower uncertainty.
On Asia, the REO states that a large domestic demand has fuelled growth in the key economic indicators, that would boost the region's industrial production and exports for most of 2010. The report also predicts that even though macroeconomic policies may become restrictive, private domestic demand should remain robust due to sustained consumer confidence, high asset values and better capacity utilization.
The REO however cautions that a still fragile global recovery and Asia's strong dependence on external demand are the risks to these baseline forecasts.
The report also warns that Asia's strong cyclical position may also pose near term risks especially if growth and widening interest rate differentials with advanced economies lead to further capital inflow into the region. This could cause overheating in some economies and increase their vulnerability to credit and asset price booms with the risk of abrupt reversals. Policy makers would need to safeguard macro economy and financial system against imbalances in local asset and housing markets.
The report also notes that India, with its demand well balanced between external and domestic sources, would benefit from financial reform and fiscal consolidation to catalyze private sector participation in infrastructure investment and support faster growth.
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