Asia is growing fast, but risks drowning in inflation. Figures released on Tuesday showed that India grew by 8.2 per cent in the third quarter, while its budget, unveiled this week, predicted growth rising to 9 per cent in 2012 against a background of sharply rising prices. China is growing quickly too, while labour shortages have sparked sharp gains in worker compensation. Politicians shrug off spikes in oil and food costs as temporary, but prices are rising at their fastest pace since the inflation explosion of 2008, and threaten a wage-price spiral. Without action, the hit from inflation will cut short Asia’s impressive recovery.
Monetary policy, in its usual form, no longer works. Raising interest rates simply draws in more capital, leaving financial conditions highly stimulative. Currency appreciation of the size needed would be disruptive – or unacceptable in countries such as China. Capital controls could square the circle, but these are never watertight. Regulatory tightening is difficult to calibrate and best serves as a complementary tool to tackle inflation. In short, the hands of central bankers are tied.
The answer, therefore, must be fiscal. India, China and others in the region need to raise taxes and cut spending. This would curtail demand and, ultimately, price pressures. Yet Asia’s governments are heading in the opposite direction, running sizeable fiscal deficits. Hong Kong and Singapore are rare exceptions.