New Delhi: India’s economy is expected to expand 8.8% in 2010 on the back of a robust recovery in private demand, the International Monetary Fund (IMF) said on Wednesday. In 2009, economic growth had slowed to 5.7% due to the downturn.
In its half-yearly World Economic Outlook, IMF said consumption would strengthen as the labour market improves. Investment will receive a boost from strong corporate profits, rising business confidence and favourable financing conditions.
In 2011, the report has projected slower growth of 8.4% for the Indian economy.
Graphic: Ahmed Raza Khan/Mint
Asia’s third largest economy has emerged from an economic downturn that resulted from the global financial crisis. Recovery was aided partly by fiscal and monetary stimulus offered by the government and the central bank. The Reserve Bank of India increased key policy rates by 25 basis points on Tuesday, the second time in two months. One basis point is one-hundredth of a percentage point.
D.K. Joshi, principal economist at credit assessor Crisil Ltd, agreed that growth will slow in 2011. “Agriculture will see a sharp growth in 2010 (due to the base effect). Also, due to withdrawal of fiscal stimulus and further monetary tightening, growth would be impacted in 2011,” he said.
In a recent report, the Asian Development Bank forecast India’s growth at 8.2% in 2010-11 and 8.7% in 2011-12. The finance ministry has projected growth at 8.5% and 9% for 2010-11 and 2011-12, respectively.
IMF said the strength in domestic demand in India and China will have positive spillovers for other Asian economies. Asia’s economy is projected to grow 6.9% and 7% in 2010 and 2011, respectively.
IMF said for economies like India, which are relatively more closed and have relied on stimulus to support growth, “the main challenge will be to ensure durable fiscal consolidation”.
But the fund cautioned that though domestic cyclical considerations may prompt early monetary tightening in some economies, these should be weighed against the risk of attracting further capital inflows.
“Large capital inflows can complicate macroeconomic management with their potential to generate inflation pressures, feed credit and asset price boom-and-bust cycles, and create pressure for steep and sudden real exchange rate appreciation,” it warned.