By Arun Kumar, IANS,
Washington: In an upbeat assessment of India’s growth outlook, the International Monetary Fund (IMF) forecasts India’s economic growth to accelerate to 8.0 percent in 2010-11 from 6.75 percent in 2009-10.
However IMF in its latest Article IV consultation paper issued Wednesday also cautioned India on the need to rein in high inflation and rising fiscal deficit.
“With India’s long-term prospects remaining strong and private sector balance sheets sound, we expect growth to be back at potential in 2010-11 even if advance economies grow below trend,” it said.
India’s economy is recovering well, with conditions now in place for a gradual tightening of monetary policy, the IMF said while indicating there is room for the rupee to rise without compromising a recovery.
“India’s economy is rebounding strongly ahead of most countries in the world, bringing policy trade-offs to a head earlier than in other countries,” the IMF said suggesting the process of tightening macro-economic policy settings should start with monetary policy.
“Moving early would also mitigate the risk of inflation expectations becoming unmoored, and thus would require a smaller overall adjustment. Initial steps could be to sequester most of the excess liquidity through increases in the cash reserve ratio,” it said.
Allowing the rupee to gain would not necessarily result in reduced competitiveness, it said noting, “Given low interest rates in advanced economies and India’s high relative growth, capital inflows are likely to be substantial.”
“With the rupee still below its 2008 peak, there would be room for appreciation without concerns about eroding competitiveness,” it said.
Other policy options may be appropriate if asset price bubbles are a threat, IMF said. However, straightforward capital controls should be used “only as a last resort,” given India’s dependence on foreign inflows to sustain investment.
The IMF also expressed concern about rising inflation in the food sector and in a warning about the country’s fiscal health, called for a reduction in its 2010-11 budget deficit.
“With the recovery becoming entrenched and India’s high debt, the risk of premature withdrawal of fiscal stimulus is low. Introducing reforms to underpin lasting consolidation will be of paramount importance,” it said.
(Arun Kumar can be contacted at [email protected])