Asian Development Bank on Thursday said Indias inflation was a cause for concern and the bank would revise upwards its earlier projection of 5% headline inflation by the end of March.
Indias high inflation is a worry… We will be revising upwards our earlier projection of Indias inflation of 5% by March 2011, chief economist Jong-Wha Lee said. ADB,which would come out with its Asian Development Report on September 28,will revise its April economic growth projection for India at 8.2% in 2010-11,he said.
Lee said monetary steps taken by Reserve Bank of India to tame inflation were in the right direction. RBI has hiked repo rate by 100 basis points and reverse repo by 125 bps since January 1 to 5.75% and 4.50%,respectively,to contain inflation. The central bank also hiked Cash Reserve Ratio twice so far this year to suck out excess liquidity of about Rs 800 billion from the banking system.
Lee said India needs to step up farm growth and productivity and remove infrastructure constraints to sustain high growth of over 9%. He admitted high growth was exerting pressure on inflation because of low farm growth and infrastructure bottlenecks but India needs to have high growth for poverty reduction. High growth is sustainable in India but structural constraints needed to be removed, he said,adding the cause of Indias inflation was mainly supply side.
He expected economic recovery in India and other Asian economies to be rapid this year. Innovative,cheaply priced products targeted at Indias booming middle class were helping to spur domestic consumption and growth but the segment remained vulnerable to economic shocks,he said.
Carefully calibrated policy measures are required to sustain income gains in the longer term,Asian Development Bank said in a report. Policies that bolster the middle class may have benefits not only for economic growth but may be more cost-effective at long-term poverty reduction than policies that focus solely on the poor, Lee said. The report said that while a strong middle class was necessary for sustainable economic growth,higher incomes are resulting in environmental pressures and a rise in diseases of affluence such as obesity,which policy makers will increasingly need to address.
Lee said measures like rural employment schemes were good for poverty alleviation in the short-term but huge investments in education and skill development are needed to remove poverty in the long term. Mere short-term measures were not enough as those who come out of poverty may slip back into it once those measures are withdrawn, he said,adding education and skill development were important for poverty reduction.
To help unlock the full potential of Indian middle class as consumers and drivers of growth,the report said the government must continue to remove structural and policy impediments to the sectors development and improve income distribution across the population.