Private domestic demand to lead recovery in India, says IMF report

Private domestic demand to lead recovery in India, says IMF report
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First Published: Thu, Oct 29 2009. 10 43 PM IST

Updated: Thu, Oct 29 2009. 10 43 PM IST
The International Monetary Fund’s (IMF) Regional Economic Outlook reiterates that the recovery will be sluggish, primarily because “G-7 (Group of Seven) consumption is consequently likely to remain weak for some time, limiting external demand for Asia’s products”. That’s well known, but what’s new is that there are signals that IMF may revise India’s growth forecasts upwards. It says that in India, there are upside risks to growth projections for both this year and the next as signs of recovery are broadening and the adverse impact of the monsoon is likely to be smaller than anticipated. And if growth is strong, can inflation be far behind? The report says “a pick-up in core inflation and inflation expectations suggest that demand pressures are already playing a role in pushing up inflation in India”.
What does this mean for policy? IMF says that policymakers in the region will need to gauge whether private sector demand has recovered sufficiently to substitute for the public sector demand provided by the stimulus packages. So far, says the report, private demand remains weak, and the outlook far from encouraging, both in Asia and abroad. Consequently, Asian countries will likely need to maintain policy support for some time. That’s more or less along expected lines.
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What’s interesting, though, is the nature of the recovery in India. The report points out that India’s “growth is expected to accelerate to 6.5% in 2010 from 5% in 2009, on the back of strong domestic demand. In particular, the normalization of financial market conditions is expected to support a rebound of private investment, sustaining demand even as the fiscal stimulus wanes”.
According to IMF, China’s expected rebound in 2010 is due primarily to the strength of the public stimulus.
In India, on the other hand, private demand is expected to bounce back very strongly in 2010 and the growth rate of private domestic demand is projected to be as high as 8.14%, far higher than the average for 2004-08. That points to a sustainable basis for the recovery, far more sustainable than in China.
Will it be consumption or investment that will drive the recovery in India? According to IMF projections, the growth of investment rate for India tapers off from 2010 and dips in 2012. And both for China and India, growth rates are not expected to go back to the heights of 2007.
Write to us at marktomarket@livemint.com
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First Published: Thu, Oct 29 2009. 10 43 PM IST