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

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

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.

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