Risk, hope beneath calmer global economy

Emerging economies including India and Indonesia were affected by the announcement of withdrawal of liquidity injection in the United States, the former chief economic advisor to the Indian government said.

US Federal Reserve Chairman Ben Bernanke's hint in May that the central bank may start scaling back its massive asset purchase program later this year on the back of a recovering economy has rattled global markets in recent months, sending its ripple effect to emerging economies.

Part of the market fluctuation is over-reaction, but in most of the emerging economies, there is a little bit of policy fumbling as policymakers are trying to tackle those difficult challenges, said Basu.

Emerging economies are going through a longish economic cycle, in which people have to live with the growth slowdown in the next one or two years and probably witness a rebound after that, Basu noted.

If China holds growth rate at eight percent after the period of turbulence, India goes back to eight-percent growth, and Brazil rises back to four-percent or five-percent growth, then the emerging economies will once again become the leading driver of the global economy, he said.

"I do expect that to happen. What we are seeing now is not a structural decline, but a long cyclical decline of emerging economies. But they will come out of it," he argued.

Basu predicted that China may not go back to 10-percent growth rate any more, because the Chinese economy had been advancing at a double-digit clip for about 30 years and there is a limit to how long a country can do that.

He said the risks facing the Chinese economy are mainly concentrated in the financial sector, including the rapid credit growth, but the good signal is that Chinese policymakers are all aware of it.

The newly inaugurated Shanghai pilot free trade zone (FTZ) is a "structural move" that is going to help China, he commented.

Basu showed confidence in emerging economies' growth potential, saying there is still global demand for their cheap products, part of which comes from the rising south-to-south trade.

Once the lingering effects of the financial crisis and US fiscal uncertainties fade away, emerging economies will gain momentum and grow very quickly, he added.