Emerging economies should be cautious of asset bubble: ADB

According to the Asian Development Bank (ADB), emerging markets including India should be cautious of asset bubble as Quantitative Easing (QE) by advanced nations may throw up such a risk.

Although QE by Japan and other advanced nations will boost their economies, such a move will also be accompanied by building asset bubbles and economic overheating, warned ADB. Since manufacturing activity in developing nations in Asia is in full swing due to domestic demand, the region is facing inflationary pressures. The easy monetary policy adopted by Japan is good for that nation and also for the entire Asian economy, but it will not come without a cost as expansionary monetary policies impact assets volatility in developing and emerging economies.

While the US economy is showing signs of improvement, the global economy is still fragile. As part of QE to boost domestic consumption, the European Central Bank has cut interest rates by 0.25% to a record low of 0.50%. It has also indicated a possibility of further policy action to support the recession-hit euro zone economy. However, there is little chance of currency war in Asia due to the fall of the Japanese Yen as a result of QE.

The emerging Asian economies, including India , China , Indonesia and Thailand , are on track for solid growth of around 6.6% this year driven by domestic and regional demand, according to ADB data. These nations seem to be on a fairly stable growth trajectory as their economies are more reliant on domestic consumption rather than export-driven demand. Consequently, ADB predicted that as the centre of gravity in the world economy moves towards east and south, the power of institutions will also move towards countries like India and China and it is inevitable for these countries to look for other institutions of funding which is also manifestation of monopolistic economic structure. Asia needs around US$800 billion for infrastructure every year and ADB is only able to provide financing for around US$21 billion. Hence, if some other institution for instance the BRICS Bank can provide supplementary finance it will benefit the economies.

On India 's tax structure, ADB commented that the country should focus on broadening its tax base and collecting it from people who do not pay taxes, instead of focusing much on marginal tax rates.

Warm regards,

Dr. S P Sharma