ECONOMY | Staff Reporter, India

What you need to know about the South Asian economy

If US tips into recession, it would directly hit exports from Asia and indirectly dent confidence and spending.

According to Standard Chartered, the message is the need to differentiate both across and within regions. No region of the world is disconnected from events elsewhere. ‘Not decoupled, better diversified’ may be accurate for the overall picture, but the need to differentiate is key.

Here’s more from Standard Chartered:

What then of Asia? In South Asia, India is enduring one of its periodic negative moods, although on this occasion it is less the overall economic climate and more politics. The spring Budget was a mid-term opportunity for the government to seize the economic initiative. Then, it was questionable whether it had. Although the commitment to boost India's manufacturing was welcome, the focus was on hitting the budget deficit target of 4.6% for the next financial year.

Since then, the rising corruption scandal has focused much business attention on a plethora of important bills passing through this session of Parliament. Now, however, optimism about the passage of business-friendly bills has waned. That being said, the Indian economy still has much going for it, not least the strength of consumption and investment last year and the solid foundation this provides on which to rebuild.

The big challenge, though, has been inflation. And as monetary policy has tightened, both consumption and investment have lost momentum. But this slowdown needs to be kept in perspective. Solid wage growth underpins consumption, and although industrial production may be slowing, it is still robust.

The near-term economic issues for India include whether the Reserve Bank of India decides to pause, or to tighten further in coming months. Events elsewhere may suggest a pause, but India's growth is so heavily domestically driven, and inflation is so stubborn, that the RBI's recent hawkish tone suggests a bias to tighten still. Perhaps commodity prices may hold the key.

The other issue is that India, given its trade deficit, requires capital inflows to fund its current account. But, overall, with high reserves of USD 315bn, India, like China, has room for policy manoeuvre. For India, though, this may be a case of putting monetary tightening on hold, while for China it may be a more pro-growth agenda.

Elsewhere in South Asia, the picture is mixed. Pakistan is struggling with high inflation and funding constraints: external financing slowed sharply following the IMF's suspension of disbursements last year, owing to a sharp build-up of debt and slow pace of reform.

Sri Lanka, meanwhile, is doing well, with sustained growth momentum, an improving external liquidity position and improvements on the fiscal consolidation front. Indeed, unlike in the West, there have been a number of rating upgrades elsewhere in the world, including for Sri Lanka. Indeed all the rating agencies have either upgraded its sovereign rating or put it on a positive outlook. This is justified. Stronger-than-expected Q1 and strong momentum into Q2 have led us to upgrade Sri Lanka's GDP forecast for 2011 (from 7.1% to 7.8%).

Bangladesh is another star performer. Its growth rate is likely to be 6% in the fiscal year which started in July, up from 5.5% in the previous financial year, although there are signs of an export-driven slowdown. Nepal, meanwhile, continues to face political problems, its economy is at a standstill and its property bubble is bursting.  

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