The International Monetary Fund (IMF) expects Indian economy to grow by 8.8% during the current financial year, up from 7.4% a year ago, mainly driven by robust growth in farm sector and pick up in consumption.
The multilateral lending agency, however, expressed concern over rising prices and underlined the need for controlling inflationary expectations by more monetary actions by the Reserve Bank of India (RBI).
The Indian economy is projected to grow by 8.8% in 2010-11. This year's growth is already benefiting from the rebound in agriculture and pick up in private consumption and employment prospects have improved and disposable income continues to rise.
The economy expanded by 8.9% during the first half of the current fiscal and, according to the government estimates, may revert to the pre-global crisis level of 9% growth. However, the IMF has projected moderation in growth form the current high levels to 8.1% in the next fiscal.
Listing rising prices as a major area of concern, RBI could take more monetary steps to contain inflationary expectations. We see room for further rate increase (by RBI) but at the same time it has to be done gradually and needs to be looked at continuously.
Food inflation, according to the data released by the government, rose to the yearly high of 18.32% for the week ended 25th December. The overall inflation was 7.48% in November. The inflation, according to IMF, could moderate to 6.5% by March end.
Besides inflation, high capital inflows and uncertainty in the global economy are the other areas of concern that could impair growth.
Risks to growth are broadly balanced with downside risks relating mainly to the global economy. Surging capital inflows could further spur investment but could complicate macroeconomic management.
In 2010, the overseas portfolio investment more than doubled to $39 billion from $18 billion a year ago. The current inflows are in comfortable zone and there is no need for capital control. However, inflows could increase absorptive capacity in future.
Following the global financial meltdown, the growth rate of the India economy slipped to 6.7% in 2008-09 from over 9% in the previous three years. Driven by stimulus packages provided by the government, the growth rate picked up to 7.4% during 2009-10.
In its annual assessment of the world's fastest growing economies, IMF, however, said that India should speed up its return to pre-crisis monetary and fiscal policies to keep the economy in check. The IMF backed the government's policy of exiting the stimulus measures implemented in the past two years.
The IMF economists, however, preferred tightening of fiscal policy, as they felt that the stimulus exit strategy remained incomplete given the high level of government debt and large capital inflows. The IMF also supported the objective to raise public investment, especially in infrastructure, and to improve social outcomes.
With tax reforms designed to be revenue neutral, IMF economists see the need for subsidy reforms-particularly liberalization of diesel and fertiliser prices-coupled with more efficient spending.
A commendable first step in fuel price liberalization has been taken and promising tax reforms are in the works. The IMF said the current account deficit is projected to reach 3.3% of GDP in 2010-11 and 3.5% next year.
The deficit has so far been financed mainly by foreign direct investment and equity inflows, but the authorities need to keep an eye on the level of the current account deficit.
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