BR Research

India and Chinas common enemy

Published June 21, 2011 Updated June 21, 2011 12:00am

Sibling rivalry pales in front of the often derisive comparisons drawn between Pakistan and her regional peers; the Achilles heel often being Pakistans dwarfed GDP growth against the thriving fairy tales of India and China.
Not anymore.
With the oom duo, China and India, launched on a rate rise spree, Pakistan has got something to relate with her star-performing neighbours.
Not unlike Pakistan, India and China have lately been battling with high levels of inflation, in particular food inflation.
Chinas 5.5 percent year-on-year increase in consumer prices in May was the highest in 34 months, with food inflation reaching double-digits.
India, similarly, is battling with what the Financial Times dubbed he highest inflation of any major emerging market, which started off with high food prices, and then spread to manufactured goods as well.
More worrisome are the responses of the citizens whove taken to riots and protests spurred by rising prices of consumer goods.
For the two economies, the glory story of their phenomenal GDP growth has come under pressure due to the economies reverting to monetary tightening in hopes of containing the inflationary winds.
Despite Chinas move of raising bank reserve requirements eight times, and interest rates four times since October 2010, economists believe much more will be needed.
Consequently, economic growth in China has slowed as Reuters quoted, "Purchasing managers surveys showed the factory sector expanded in May at it slowest pace in at least nine months."
In step with the Asian superpower, India also undertook the tenth rate rise in eighteen months last week to try to turn off the tap of rising inflation. The spillover on the Indian economy is also evident from the dawdling manufacturing growth, which was the slowest in four months last May.
Ironically, while central banks rate rise help control the spiral of inflation expectation, analysts believe that the persistent inflation in both countries is largely supply-driven, meaning that monetary tightening, being a demand-side measure may not be sufficient.
Unless efforts are made to control imports and resultantly imported inflation, the countries may be seen battling with the issue for quite a few months down the road.