Thursday, March 19, 2009

IMF Report on State of Indian Economy

Commending India's strong economic performance in recent years, the International Monetary Fund (IMF), in its recently released annual review of the Indian economy, has stated that India confronts the current global economic and financial crisis from a position of strength.
India's strong economic performance in recent years reflected sound macroeconomic policies and continued progress with structural reform, the IMF Executive Directors said in their assessment after their annual Article IV Consultation with New Delhi.

Observing that there have been spillovers from the global crisis, they commended Indian authorities' swift and comprehensive policy response, but underscored the downside risks and called for maintenance of a flexible, pragmatic, and proactive policy stance.

GDP Growth
The IMF report forecast that India's Gross Domestic Product (GDP) growth would slow to 6.3 per cent in the 2008-2009 fiscal year, ending in March 2009, and to
5.3 per cent the following year. That would be well below the nine per cent growth rate in the 2007-2008 year.

The report stated that the uncertainty surrounding the forecast is unusually large, with significant downside risks. The main upside risk stems from a larger-than-anticipated impact of the stimulus measures that the authorities have already implemented. The IMF report cautioned that India's debt as a percentage of GDP was already high, so a big expansion of the deficit could raise concerns about fiscal sustainability. Any additional stimulus should be focused on "high-quality infrastructure and poverty-related spending" or to recapitalise banks if needed.

Rate of Inflation
The IMF expects the rate of India’s inflation to hover around two per cent during 2009-10, mainly on account of declining commodity prices and weakening demand resulting from economic slowdown. With commodity prices waning and demand slackening, inflation is expected to fall further to three per cent by March 2009 and to two per cent on average in 2009-10", the IMF stated in its report.

The inflation rate, as per the provisional government data, has dipped to 2.43 per cent for the week ended March 1, 2009, much ahead of the IMF's March-end projection of three per cent.
As per the IMF data, inflation is expected to average around 8.8 per cent during the current fiscal which witnessed historic increase in crude oil and commodity prices in the international market and subsequent impact on the Indian economy.

The inflation, which peaked to 12.91 per cent in the second week of August 2008, has been declining and the fall became sharper following the global financial meltdown triggered by the collapse of iconic American investment banker Lehman Brothers in September 2008.
Flexible Exchange Rate
The report stated that the given the budget constraints, monetary and structural policies would have to do the heavy lifting. But directors were split on whether there was scope for more interest rate reductions or if a wait-and-see approach was preferable.The IMF supported India's flexible exchange rate policy, and stated that currency market intervention should be consistent with the goal of ensuring sufficient domestic liquidity.Concluding the report, the IMF stated that India's exchange rate appeared to be close to its equilibrium level.

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