India: Rapid Growth with Promising Medium-term Prospects

At 8¾ percent, India GDP growth for 2010/11 projected to be above trend

IMF backs attempts to bring down elevated inflation

Subsidy reforms needed to meet fiscal consolidation targets, says IMF

In its report on the Indian economy—known as the Article IV consultation—IMF economists said they expect the South Asian country to grow above trend this year, with high levels of growth continuing over the medium term

“We expect real GDP to grow 8¾ percent in 2010/11, with robust growth supported by high investment in infrastructure and productivity gains,” said the IMF’s mission chief for India, Masahiko Takeda.

India weathered the recent global financial crisis well, and since mid-2009 domestic demand has powered a vigorous recovery. The country’s growth rate remains among the strongest in the world.

Toward a more normal policy stance

In its report, the IMF backed the authorities’ policy of exiting from the stimulus implemented in the past two years. But this exit strategy remains incomplete.

Given the high level of government debt, existing strong domestic demand, and large capital inflows, IMF economists said that fiscal policy is the preferred method for tightening.

In their assessment, the report’s authors welcomed the authorities’ renewed commitment to fiscal consolidation: the government has laid out an ambitious roadmap to reduce public debt and deficits, and high growth is expected to contribute toward this goal as well.

The IMF also supported the objective to raise public investment, especially in infrastructure, and to improve social outcomes. The challenge will be to make savings elsewhere to meet these objectives while remaining on the consolidation path.

Carrying through with consolidation

With tax reforms designed to be revenue neutral, IMF economists see the need for subsidy reforms—particularly a liberalization of diesel and fertilizer 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,” notes the report.

Strengthening the budget framework will be important to minimize risks to fiscal consolidation, while the government’s strong revenue position this year presents an opportunity to reconstitute fiscal space faster and reduce the risk of overheating, say the economists.

Tackling inflation

The IMF report also recommends further tightening monetary policy to meet the authorities’ inflation objectives and anchor...