Asian economies including India and China have grown at a scorching pace until now. Thus the hopes are pinned on them to rebalance a global economy in doldrums due to the crises in the developed West. But these Asian economies have not been without their troubles and most of them have been battling inflation for quite some time now. Infact, inflated prices of food and fuel present the biggest threat to Asia's economic development. And governments will be faced with the challenge of limiting these rises through currency intervention.
Food inflation is set to be the bigger problem going forward. In India for instance, supply side glitches have been one of the major reasons for the rise in food prices. But food shortages could become a global phenomenon too. This year especially, world food prices have risen to record highs due to disruptions in farm output on account of natural disasters and unpredictable weather across regions. But that is not all. Demand for food has remained high too. And this is expected to be the case in the future as well as the middle class keeps expanding. All of which points to the possibility of food prices remaining high for some years to come.
It is dealing with this that will test the mettle of central banks across Asia. The latter so far has responded to the challenge of inflation by hiking interest rates and reserve ratios. These would certainly dampen domestic demand to a certain extent and hurt corporate profits. But there is also the fear that if such monetary measures strengthen their currencies too fast, it could attract too much speculative money from regions with lower rates (read the US and Europe). That in turn will make exports from Asia expensive and thwart overall growth.
Thus, it is obvious that monetary tools cannot be solely depended upon to tackle food inflation. More long term solutions will be needed. And the chief among these would be to increase agricultural output. This is through better irrigation methods, boosting crop yields and ensuring adequate storage facilities for food grains. In India especially, the government will have to pull up its socks and get its act together if it wants to ensure that very high inflation does not remain a permanent feature for the Indian economy. Otherwise, surely the dream to sustain GDP growth rate at 9% plus will remain just that; a dream.