IMF Survey: India: Rapid Growth with Promising Medium-term Prospects

IMF News, January 5, 2011

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Real GDP growth projected at 8¾ percent in 2010/11.
Growth described as above trend for 2010/11 and expected to remain high over the medium term.
Recovery since mid-2009 powered by domestic demand; growth supported by high investment in infrastructure and productivity gains.
India’s growth rate remains among the strongest in the world.

IMF backs exit from crisis-era stimulus but notes the exit strategy remains incomplete.
Fiscal policy is preferred for tightening given:
- high level of government debt,
- existing strong domestic demand,
- large capital inflows.
Government has laid out an ambitious roadmap to reduce public debt and deficits; high growth is expected to contribute to consolidation.
Policy recommendations:
- Speed up return to pre-crisis monetary and fiscal policies.
- Carry through fiscal consolidation while raising public investment, especially in infrastructure, and improving social outcomes by finding savings elsewhere.
- Undertake subsidy reforms—particularly liberalization of diesel and fertilizer prices.
- Implement more efficient spending and strengthen the budget framework to minimize risks to fiscal consolidation.
- Take advantage of the government’s strong revenue position this year to reconstitute fiscal space faster and reduce the risk of overheating.

Inflation currently elevated in the range of 8½—10½ percent.
Inflation expected to come down slowly as last year’s high food prices caused by poor rainfall drop out of the inflation calculation, but underlying price pressures remain strong.
Authorities have raised policy rates and the cash reserve requirement over the last year.
IMF recommends further tightening monetary policy to:
- meet the authorities’ inflation objectives,
- anchor inflation expectations,
- bring real short-term interest rates in line with historical norms,
- contain inflation.
Observation: With little or no spare capacity and the threat of rising food prices, a greater burden falls on monetary policy to cool the economy when fiscal withdrawal was delayed.

Current account deficit projected to reach 3.3 percent of GDP in 2010/11 and 3.5 percent next year.
The deficit has been financed mainly by foreign direct investment and equity inflows to date.
Risks identified:
- Potential impact of a sudden stop or reversal of capital flows as the deficit rises.
- Inflows could exceed India’s capacity to absorb them.
Policy guidance:
- Exchange rate appreciation should remain the first line of defense against disruptive inflows.
- If appreciation becomes too large, consider intervention in the foreign exchange market or macroprudential measures.
- Over time, deepen the corporate bond market, increase the supply of shares, and further liberalize foreign direct investment to increase capacity to absorb capital.

Infrastructure investment has grown rapidly; authorities plan to double spending from $500 billion in the five years ending 2011/12 to $1 trillion in the following half a decade.
Private participation expected to account for half of the total.
Obstacles to meeting targets include:
- availability of financing,
- land acquisition,
- multiple clearances,
- capacity constraints,
- governance issues,
- sector-specific concerns.
IMF view and recommendations:
- Structural reforms are needed to lower the cost of infrastructure, encourage private investment, and allow more efficient use of public resources.

Source: IMF Survey: India: Rapid Growth with Promising Medium-term Prospects.