Inflation worries both India

New Delhi, Mar 9: Both India and China are worried over the high inflation.

While it crossed the Reserve Bank of India's tolerance limit of 5 per cent last month, annual consumer inflation hit an 11-year-old high of 7.1 per cent in China in January. Consumer inflation averaged 4.8 per cent in China last year, well above the government's target of 3 per cent, mostly due to big rises in the cost of food and housing, Chinese premier Wen Jiabao noted in his annual 'state of the nation' report to National People's Congress last week. The inflation rate stood at 5.02 per cent in India for the week ended February 23, up from 4.89 per in the previous week. This was the highest in last 10 months.

Dwelling on risks that heady inflation poses to China's social fabric, Wen said ''The current price hikes and increasing inflationary pressures are the biggest concern of the people.'' Speaking in Paris over the weekend, Reserve Bank's Governor Y V Reddy said price stability remains its top priority as large segments of poor people are affected instantly by rise in prices.

While Chinese are equally concerned over its overheating economy growing at double-digit rate, Indian policy-makers, on the other hand, are getting worried over the economic slowdown. As against 9.4 per cent growth in fiscal 2006-07, Indian economy is likely to grow by less than 9 per cent in the current fiscal ending on March 31.

An international rating agency said after five years of sizzling double-digit growth, China's economic expansion should finally ease to a single-digit rate in 2008.

Standard&Poor's in a report on China's Economy In 2008, said ''The cooler pace will result from the significant global economic slowdown and from domestic policy tightening.'' However, real GDP should will still expand at a strong 9.3 per cent for the year, said agency's analyst Kim Eng Tan.

Unusually heavy snowfalls in January and February brought chaos to domestic transport and slowed Chinese economic activity in many parts of the country.

Despite its harshness, Standard&Poor's expects this unusual weather to take only a fraction of a percentage point off the GDP, partly because the damage is proving to be temporary.

In a report from Singapore, S&P's said the greatest disruption to manufacturing in China came during the spring festival period, when production is seasonally slow. But once the weather improves, production can be ramped up to cover part of the shortfall.

''Higher food prices will keep headline inflation elevated at least for the first six months of 2008,'' Tan noted adding Based on expectations that the situation will improve in the second half of the year, we project inflation in 2008 at 4.4 per cent.'' With robust growth, Chinese macroeconomic policies are likely to stay focused on reining in growth. However, the still-uncertain impact of a global slowdown will probably rule out any bold moves.

Fiscal policy will most likely remain conservative, and the general government deficit will come in at below 1 per cent of GDP for 2008 (similar to the estimate for 2007).

The rating agency said monetary policy tightening, which began in earnest in China during the second half of 2007, will also continue in 2008. In line with the tightening monetary policy, the Chinese yuan should further appreciate in 2008.

Although the currency's approximately 7 per cent rise against the U S dollar in 2007 was significant, its nominal effective exchange rate only rose marginally.

China's trading partners had similar currency increases against the greenback. As long as economic growth remains steady at a healthy rate, the government is likely to accommodate further appreciations in the nominal effective exchange rate, the S&P's study concluded.

UNI