India is expected to grow by 8.75 per cent in 2010 and 8.5 per cent in 2011, driven by a strong domestic demand, International Monetary Fund said in its 2010 World Economic Outlook released in Washington on Wednesday.
It said India's projected growth will be supported by a resurgence in demand from the working class on the back of an improvement in business confidence that will result in more investments.
"Domestic demand will strengthen as the labour market improves, and investment is expected to be boosted by strong profitability, rising business confidence and favourable financing conditions," it said.
However, in terms of growth, China will still be ahead of India, it said. "In China, GDP growth exceeded the government's eight per cent target in 2009 and is expected to be close to 10 per cent in both 2010 and 2011," the report released on the sidelines of the spring meeting of the IMF said.
"What has been so far mainly a publicly driven growth path, built on infrastructure investment, is expected to turn toward stronger private consumption and investment," the 2010 World Economic Outlook report said about China.
The World Economic Outlook said the strength in final domestic demand in India, and especially China, is expected to have positive spillovers for other Asian economies, particularly exporters of commodities and capital goods.
Asia's GDP is projected to grow by seven per cent in both 2010 and 2011. In Korea, economic activity is expected to expand by 4.5 per cent in 2010 and five per cent in 2011, strongly accelerating from 0.25 per cent in 2009.
"This reflects not just strong export growth - with capital exports to China an important element - but also a continued boost from the inventory cycle and a boost in business investment in response to high capacity utilisation
and strong business confidence," it said.
All these factors should help offset the impact of the expected withdrawal of fiscal stimulus in 2010, it added.
The ASEAN-5 economies are projected to grow by 5.5 per cent in 2010. Private domestic demand is expected to be the main driver of growth, with net exports playing a lesser role than in the past, reflecting stronger imports relative to historical standards, the report said.
Among the ASEAN-5, the Indonesian economy has proved to be remarkably resilient, with output growing at 4.5 per cent in 2009 compared with 1.75 per cent for the ASEAN-5 as a whole. This growth of the Indonesian economy is buoyed by strong domestic demand and less dependence on trade.
Indonesia's growth is expected to accelerate to six per cent in 2010 and to 6.25 per cent in 2011, reflecting a pick up in private investment, the report said.
The report said that for economies such as India, which are relatively more closed and have relied on stimulus to support growth, the main challenge will be to ensure durable fiscal consolidation, including by implementing fiscal and
other structural reforms.
On the other hand, Japan faces significant challenges in strengthening domestic demand and fighting off deflation, given the need to bring down the high level of public debt and with the policy rate near the zero bound.
For policymakers in Asia's export-driven economies, who now face the prospect of weaker external demand conditions, a key challenge is to effect a durable rebalancing toward domestic sources of growth, it said.
With regard to monetary policy, the report said it may not be too early to start unwinding the stimulus if output gaps are closing and inflation pressures are beginning to emerge.
"This appears to be the case already for a few economies in the region, including Australia, India, and Malaysia, where authorities have already started tightening monetary policy,"said the World Economic Outlook report.
"In China, the withdrawal of the exceptional monetary stimulus introduced in 2009 will also minimise the risks from excessively easy credit conditions.
For other economies in the region, where the recovery of private demand is more uncertain and where output gaps are likely to close more slowly, policymakers should avoid premature tightening of monetary conditions," it noted.
For Japan, with the re-emergence of deflation, the current accommodative monetary policy stance remains appropriate, but additional easing measures may be necessary if deflation persists, the report said.
