India, China may escape economic crisis

India and China will escape the downturn that other countries in the world are expected to face, with Asian countries expected to grow by at least seven per cent and nine per cent respectively during the current fiscal, Deutsche Bank Chief Economist Norbert Walter said on Wednesday.

Delivering a lecture on 'World Economy - Longest Ever Recovery About to End?', Walter said he sympathises with the concerns expressed by the Reserve Bank over inflationary expectations in its quarterly review of the monetary policy.

RBI had hiked interest rates at which banks park their short term funds with the central bank and vice versa by 0.25 per cent each, leading to increase in interest rates by some banks.

To make up for the slowing down of investment that certain interest rate sensitive areas may witness, India should facilitate pumping of funds in other areas, he suggested.

Inflationary expectations are there since the price rise of certain raw materials have not been factored into consumer prices, he said.  He did not favour the policy of the government not to fully pass through prices of surging oil products on to consumers.

International oil prices should be fully factored into consumer prices as otherwise the government budget deficit would widen as it keeps helping oil companies, Walter said.

Ways should be found to help the vulnerable sections of the society, who would be put into hardship by such measure, he suggested. He said international oil prices are expected to average $70 a barrel during 2006 and 65 dollars in 2007.

At eight per cent budget deficit (of both Centre and states), India cannot afford to further increase it by not passing on the full impact of international oil prices on to consumers, Walter said.

He said widening current account deficit of India is dragging the exchange rates down and it does not bode well for inflation. "Most probably, RBI will be on alert," he said. However, the Indian growth story continues amid external risks with the services sector surging ahead and the industry witnessing solid growth, he added.

To a query on the fear of the asset bubble in India and China, he said inefficient allocation of investment leads to soaring prices in certain areas and deficiency of funds in others.

The situation is more alarming in China since 40 per cent of companies are state-owned and restrictions on market forces do not allow right signals to emanate for investors.

He also advised Indian authorities to allow capital markets to function in an optimal manner so that resources are efficiently allocated.