Chindia: Inflation & Asset Bubble - Double Trouble

Inflation and growing asset bubbles are the two top most concerns facing the two biggest economies in Asia.

China and India have emerged strongly from the global financial crisis than any other economy in the world. However, the two Asian giants are facing increasing public dissent due to inflationary pressures, especially in housing and food. In China, worrying property prices are the top most concern. Housing prices in major Chinese cities soared by more than a fifth in 2010. This has raised doubts about the effectiveness of tough monetary measures announced by the central bank during 2010.

In India’s case, its prime worry is the runaway food inflation which stood at 15.5% in December 2010, the highest of any major economy in Asia; though China is not far off at 9%. To add to that, India’s widening current account deficit threatens to dent the overall confidence in the economy. According to RBI’s latest report on the economy, the foreign direct investment (FDI) in India fell by more than a third from April to September 2010. During this period, FDI stood at $12.6 billion, a 36% decline compared to the first half of the previous fiscal. The sectors that witnessed the sharpest declines were in the construction, mining and business-services sectors which appear to have affected the investors' sentiments due to hurdles in environmental clearances, problems in land acquisition and lack of availability of quality infrastructure.

Source: RBI

Though both countries have been raising interest rates to avoid crimping strong economic growth, yet the corporate sector in both the countries feel that governments are not doing enough to sustain the growth momentum. According to Matt Robinson, Senior Economist at Moody's Analytics, “Public discontent is emerging in Asia's largest emerging economies, India and China, threatening to derail the region's growth prospects.” 

Economists add that India's structural problems are likely to make it less attractive. Besides, increasing inflationary pressure is creating a lack of business confidence. They suggest that Indian government needs to step up reforms to avoid further declines. Mumbai-based Sujan Hajra, Chief Economist at Anand Rathi Financial Services says that FDI stands as the most preferred form of capital inflow which India wants. Declining FDI should be an area of concern for policy makers going ahead.