Further increases in fuel price would pose a greater challenge to the Indian Government compared with other South Asian economies, according to Mr Paul Gruenwald, Chief Economist, Australia and New Zealand Banking Group.

Addressing ‘India, Australia and the World: Beyond the Global Financial Crisis' organised by the Indo-Australian Chamber of Commerce, he said

India and China are the only two big countries in Asia that have regained the pre-financial crisis trend.

On the lingering concerns of whether to address growth or inflation, he said inflation is definitely a bigger risk seen by higher food and fuel prices.

Headline inflation remains high in India at 8.4 per cent and is rising again. This suggests that there are additional price pressures in the system in the near term, he said.

Mr Gruenwald said that Reserve Bank of India has been one of the more aggressive central banks in emerging Asia to hike rates, and it appears that more needs to be done. Compared to other countries in Asia, India had posted solid steady growth through the financial crisis with only a minimal dip in activity in 2008. Both consumption and investment growth have been strong throughout.

Cause of concern

Trade deficit has been a bit lower but current account remain a concern for India. Nonetheless the current account deficit (as a percentage of Gross Domestic Product) is large due to large capital inflows which lead to vulnerability of the economy, he said.

Coal and gold, two important commodities, form almost 85 per cent of exports from Australia to India. Both these commodities demand from India are likely to continue to rise owing to industrialisation and the rise of middle class.

India's exports to Australia have become more diversified over the past decade with less reliance on manufacturing. Although India's exports to Australia may be limited in terms of goods and services but there have been large inflows of capital in terms of foreign direct investment.

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