New Delhi: The International Monetary Fund (IMF) has projected 8% GDP growth for India in the medium term but said the country would require policies to foster improvements in labour market conditions for better job creation and in the financial sector for sustaining investment efficiency.
The IMF projection has come at a time when the Planning Commission has proposed 9% Gross Domestic Product (GDP) growth rate in the 11th Plan (2007-2012).
“The recent shift to a more investment-led growth pattern, along with strong productivity gains, seem to have raised India’s medium-term potential growth to around 8%,” an IMF working paper on “Wild or tamed? : India’s potential growth” said.
Referring to the downside risks, the IMF paper pointed out, “the pace of investment could decline as well, to the extent it is underpinned by cyclical forces.”
Based on the experiences of the fast-growing Asian economies, the paper said even productivity gains, which are pushing up India’s growth, could become volatile, adversely impacting India’s growth story.
India, it added, would need continued improvement in economic policies to deal with the problems emanating from volatility in productivity gains.
It said the country’s investment efficiency is at a high level of 35% of GDP over the medium term, comparable to the Asian countries just before the crisis, and maintenance of this rate would need meeting some challenges.
Issues to be grappled with include the large share of state-owned banks, high statutory liquidity requirements that compel banks to set aside a quarter of their deposits for government securities, high lending requirements (40% of net lending) to priority sector and underdeveloped government and corporate bond markets, it said.
The report also pointed out that there is no guarantee that the current pace of productivity growth would be sustained, and “It should not be implied that investment trends would not matter.”
It further said that productivity growth could be experiencing cyclical upswing and capital stock growth could be subject to downside risk as investment tends to be a volatile component of the GDP.