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Business News/ Home Page / IMF sees strong medium-term outlook for India
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IMF sees strong medium-term outlook for India

IMF sees strong medium-term outlook for India

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Istanbul: The outlook for India’s economy in the medium term is quite strong and the IMF may even raise its 6.8% growth forecast for the 2010-2011 fiscal year as domestic demand and exports pick up, a senior IMF official said on Monday.

But the International Monetary Fund’s deputy director for Asia and Pacific, Kalpana Kochhar, told Reuters at the IMF-World Bank conference in Istanbul that India should keep monetary stimulus measures in place until it saw clearer signs of a recovery.

“In 2010-2011 we see it picking up to 6.8% and I see some upside potential to that forecast," Kochhar said.

The IMF expects economic growth of 5.8% for 2009-10 (April-March). India’s growth slowed to 6.7% in 2008-09 as the global downturn hit harder than expected, after growing at 9% or more in the previous three years.

India’s outlook was quite strong because unlike some other Asian countries, it had two engines of growth -- a very strong domestic demand base and exports, Kochhar said.

She said domestic demand would be spurred by infrastructure investments and demographic changes.

Infrastructure investment “has been a problem for a while but I do get a sense that this is now taking policymakers’ attention front and centre," she said.

“It is something people want to work on and there seems to be a lot of single-minded focus to get infrastructure investment done, and the private sector also sees the need.

“That is why I believe the medium-term, three- to five-year outlook for India is quite strong."

Deficit

Kochhar also said the Indian banking system was “in pretty good shape".

“There is going to be some pick-up in NPL (non-performing loans) just because the cycle has turned, but that is in the normal course of events."

However, the government’s fiscal deficit has widened because of higher spending and cuts in taxes and duties to support industry and keep the economy growing. The 2009-10 deficit is forecast at a 16-year high of 6.8% of gross domestic demand.

Kochhar said she saw the deficit being reduced next year.

“I think we will see action on trying to get the deficit, I mean fiscal balances, on a declining path," she said.

Kochhar also expects India’s financing committee, a constitutional body that meets every five years, to present recommendations on tackling the deficit.

“When the finance commission reports, which is expected in December this year, I think the path for fiscal policy will be specified or suggested by them and adopted in some shape or form by the authorities," she said.

Reserve Bank of India governor said on Monday that India needed to exit from excessively accommodative monetary and fiscal policies, but there was no consensus on when or how, given competing concerns about growth and inflation.

“We don’t believe they should do it now...exports are pretty weak and credit growth is pretty weak," Kochhar said.

“We would like to see more signs that everything is pointing in the same direction before we judge there would be a recovery. So, that would be when we think they would need to start taking out some of the stimulus."

Kochhar also said she would like to see India tackle inflation sooner rather than later.

Rupee Convertibility

India’s rupee currency is not fully convertible, which is one reason that a proposed merger between Indian telecommunications firm Bharti Airtel and South Africa’s MTN collapsed last week.

South Africa wanted a dual listing structure for the shares to protect the national character of MTN, but Indian capital controls prevented that by restricting fund flows between the countries.

“I think in practical terms the constraints imposed by the relative closed nature of capital accounts will become more and more apparent, but again it is a balancing act," Kochhar said.

“We (the IMF) are, I think, okay with that in large part because they (the authorities) have been very pragmatic about that. I think when the constraints become binding they have tended to do things to lift them.

“I am actually quite hopeful things will happen when they need to happen."

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Published: 06 Oct 2009, 11:29 AM IST
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