India, China to continue leading Asian economic growth: IMF

"We expect growth to remain strong. We expect it to settle at a more sustainable rate of about 7 per cent for Asia as a whole, slightly down from 8 percent in 2010. We see China and India continuing to lead Asia's growth," IMF Head (Asia-Pacific) Anoop Singh said on yesterday.

"Despite this positive outlook, there are still downside risks, but these mainly come from the external environment: the risk that global growth could be weaker than we anticipate.

Also financial spillovers from advanced countries, especially in Europe, could be another source of concern, and constitute another downside risk," Singh said in interview to the IMF online survey.

However he warned that the strength of Asia's growth could lead to the threat of inflation.

Asia had to contend with the risks posed by possibly weaker global economic growth and financial spillovers from advanced economies, he suggested, but predicted that the region's economic importance would continue to increase, he added.

"I think what you've been seeing in the last decade has been the further rise of Asia, and this time I will say it is a large part due to the rapid growth in China and India and this is expected to continue over the medium and the long term," Singh said in response to a question.

Certainly the region has a certain dependence that needs to be rebalanced so that the momentum comes from a broader set of policies, he said.

"It is true that across Asia the region has been more dependent on exports than other emerging markets in the world.

And, therefore, in order to maintain these high growth rates, we do believe the region should reduce its reliance on export growth and we have emphasised the importance of rebalancing. That is, to raise domestic demand in Asia. This is also a major topic in our discussions with countries in Asia," Singh said.

In 2011, he said Asia will face two set of challenges. The first will involve managing the timing and exit from policy stimulus that many countries in Asia have used.

"This is because output is growing above potential in most economies. In fact, output gaps are closing and inflation pressures are emerging. So, our view is that although many countries have taken steps to remove monetary stimulus, there still is further room to remove policy stimulus," he said.

"So I think the withdrawal of monetary and fiscal stimulus needs to be accelerated and this needs to be managed in conjunction with stronger currencies...We need greater upward flexibility in the currencies of many countries in Asia," he argued.

"The second point is how to manage capital inflows that have clearly flooded many parts of Asia. Partly this is due to the growth divergence. We see higher growth in Asia compared to advanced economies," Singh said.

"On one hand, these inflows certainly present many opportunities, but we need to build the economic framework to ensure these capital inflows can create momentum for investment and broader coordination over the medium term," he said.

"However, in the near term, they create challenges for financial stability. And, therefore, countries are taking measures—including macroprudential measures—to try to deal with them.

I do believe that there is more room to take macroeconomic measures and also I will say that greater exchange rate flexibility offers an important buffer against the risks we see posed by the large capital inflows," Singh said.