New Delhi: The International Monetary Fund (IMF) on Wednesday raised its forecast for India’s economic expansion this year by almost one percentage point, but cautioned that sustained acceleration of growth in the country and other emerging economies depends on a recovery in advanced nations.
In its World Economic Outlook update, IMF revised its 2009 growth projection for India to 5.4%, up from its April forecast of 4.5%. In 2010, the country’s economy is projected to expand at 6.5%.
Global economic activity is forecast to contract by 1.4% in 2009 and expand by 2.5% in 2010. Sandeep Bhatnagar / Mint
“Prospects for a pick-up in growth have also improved in India, where the growth outcome in the first quarter was significantly better than expected, owing in part to policy stimulus,” it said in a note titled Global Economic Prospects and Effectiveness of Policy Response.
However, IMF warned that the stabilization in the global economy is “uneven” and recovery is expected to be sluggish.
“The global recession is not over, and the recovery is still expected to be slow,” it said. Global economic activity is forecast to contract by 1.4% in 2009 and expand by 2.5% in 2010, which is 0.6 percentage point higher than that envisaged in April. Sustained acceleration of growth in emerging economies depends on a recovery in advanced counterparts, it said.
India’s economy expanded 5.8% in January-March, beating the expectations of forecasters. In fiscal 2008-09, India’s gross domestic product (GDP) grew 6.7%.
“While India’s growth rate is enviable in international comparison, it has declined markedly as a result of the global crisis,” said Sanjaya Panth, senior resident representative of IMF in India. “Under these circumstances, the government has decided that additional fiscal stimulus is needed to support economic activity.”
However, he cautioned that going forward, the high level of public debt requires India to be mindful of the limits to fiscal space. “The priority now is to combine the fiscal stimulus with ambitious fiscal reforms (such as to the subsidy regime) to safeguard medium-term debt sustainability,” Panth added.
Finance minister Pranab Mukherjee, in the Budget announcement on Monday, said the fiscal deficit is set to touch 6.8% of GDP in 2009-10, compared with the estimate of 5.5% in the interim Budget he presented earlier this year.
IMF said emerging and developing economies will regain their growth momentum during the second half of 2009 although with notable regional differences.
The finance ministry, in its recent Economic Survey 2008-09, said that India’s economy is expected to recover in the September-December quarter this year.
“Low income countries are facing important challenges of their own because official aid has fallen and these economies are particularly vulnerable to swings in commodity prices,” it said.
IMF upgraded its growth projection for emerging Asia due to “improved prospects in China and India”, partly reflecting “substantial macroeconomic stimulus and a faster-than-expected turnaround in capital flows”.
The emerging Asia region is expected to grow 5.5% in 2009 and 7% in 2010.
IMF advocated “stronger medium-run fiscal policy frameworks” while maintaining that fiscal policy should stay supportive through 2010. “Plans should be made for rebuilding fiscal balances and ensuring suitable debt paths after growth is firmly re-established.”
In its update to the Global Financial Stability Report, IMF said that vulnerabilities in the financial sector remained and complacency must be avoided, while maintaining that “financial conditions have improved as unprecedented policy intervention has reduced the risk of systemic collapse”.