IMF pegs India's GDP growth at 8.75 %

The IMF said: "India's economy is projected to grow by 8.75 per cent in real terms in 2010-11, moderating to about 8 per cent the following year. Following last year's drought, 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.''

Growth driver

• Infrastructure would remain an important growth driver and corporate investment would accelerate, aided by conducive financing conditions and robust demand growth. "India's medium-term growth prospects remain strong. The economy is expected to continue to expand rapidly, supported by high investment and productivity gains.''
• Holding that risks to growth are broadly balanced with downside risks relating mainly to the global economy, the IMF report said that while surging capital flows could further spur investment, it could also complicate macroeconomic management.
  
• Sustained rapid growth over the medium-term, it said, would depend on sustaining reforms to facilitate infrastructure investment such as deepening the corporate bond market and lowering the cost of doing business. "Improving social outcomes and infrastructure are two key pillars of the government's strategy to achieve rapid and inclusive growth," it said.

RBI efforts lauded

Turning to rising prices of food and other manufactured products as another major area of concern, the IMF lauded the RBI's efforts to tighten monetary conditions but noted that since short-term real interest rates still remain below historic norms and financing conditions have hardened only marginally, there was room for further steps to bring the real repo rate clearly into positive territory.

Apart from inflation, the IMF listed large capital inflows above India's absorptive capacity owing to low yields in advanced economies as another problem area that could impede growth. "While exchange rate flexibility would remain the first line of defence, reserve accumulation and macroprudential measures could be employed if strong flows continue," it said. According to Mr. Panth, the current inflows are in the 'comfortable' zone and there is no need for capital control.

Fiscal situation

As for the fiscal situation, the IMF felt that India should speed up its return to the pre-crisis monetary and fiscal policies to keep the economy in check. While hailing the government's policy of stimulus exit, the IMF board preferred tightening of fiscal policy as the stimulus exit strategy still remains incomplete in a scenario of high government debt and large capital inflows.

The IMF has estimated India's current account deficit (CAD) to touch 3.3 per cent of GDP in 2010-11 and rise to 3.5 per cent next year. While so far, the deficit has been financed mainly by foreign direct investment and equity inflows, the authorities need to keep an eye on the CAD level, it said.

PTI reports:

Subsidy reforms

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 liberalisation of diesel and fertilizer prices — coupled with more efficient spending.