India zigs while Indonesia zags

Indonesia and India, the two emerging markets hardest-hit in recent weeks by falling currencies and other financial troubles, have taken opposite tacks as they struggle to balance growth with the threat of inflation.

Indonesia's Vice-President characterised higher interest rates and a weakened currency as the "new normal". Boediono, who uses only one name, said Indonesia would face a tougher international financial environment in coming months and should give greater emphasis to a stable currency, stable prices and a stable trade balance, and not just pursue economic growth.

"We have been addicted, so to speak, with an easy money environment for four years," said Boediono, the main architect of Indonesian economic policy since the Asian financial crisis in 1997 and 1998.

"We know that we have to make some adjustments, and maybe by next year, we have to really, fully adjust to a new normal, so to speak, where easy money is no longer" available.

But in Mumbai, the new governor of the Reserve Bank suggested India faced less of an international threat after the US Federal Reserve decided last week to continue its economic stimulus, at least temporarily. The governor, Raghuram Rajan, lowered a key interest rate by 75 basis points.

India had pushed interest rates up sharply to make investments there more attractive and slow the fall of the rupee. Reversing part of that increase now "will provide a boost to growth", Mr Rajan said.

In monetary terms, India is zigging while Indonesia is zagging, despite the many common challenges that have pummelled their currencies and markets in recent weeks. Both must balance a need to preserve economic growth for large, heavily poor populations, while at the same time preventing a build-up of inflation that might discourage longer-term investments - a balancing act that has bedevilled policymakers in the US and other affluent countries over the years.

India, with a population of 1.2 billion, and Indonesia, with 250 million, are struggling to modernise their infrastructure, while stuck with complex land ownership laws that make it hard to redevelop cities rapidly. Both are wrestling with costly fuel subsidies that are driving up government budget deficits.

Both have sizeable current-account deficits compared to their output, together with nearly double-digit inflation in consumer prices.

Perhaps most important, both face national elections next year that limit their ability to make politically unappetising economic decisions: India will elect a new parliament by the end of May, while Indonesia will elect a new legislature in April and a new president in July.

The different policies outlined on Friday reflect differences in the seriousness of their predicaments, with India appearing to be in considerably worse shape.

While Indonesia's ports and highways still have shortcomings, they are good enough that the country has emerged as one destination for the many firms shifting operations away from China in response to surging blue-collar wages there. India's bureaucracy is stifling, and the country's roads are so bad that vehicles slow to walking speeds.