New Delhi: China and India—Asia’s first and third largest economies, respectively—should aim for “growth-friendly" fiscal consolidation to promote sustainable, inclusive growth while enhancing resilience as the two countries together contribute 45% to global growth, the International Monetary Fund (IMF) said on Wednesday.

“Asia continues to be both the fastest-growing region in the world and the main engine of the world’s economy, contributing more than 60% of global growth (three-quarters of which comes from China and India)," IMF said in its Asia Pacific Regional Economic Outlook.

Finance minister Arun Jaitley paused fiscal consolidation in 2017-18 as the economy recovered from disruptions related to demonetization and the roll out of the new national goods and service tax (GST). The government has committed to bring down its fiscal deficit as a proportion of gross domestic product (GDP) to 3.3% in 2018-19 from a higher-than-anticipated 3.5% last year.

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IMF said, given increased inflation pressure, India’s monetary policy should maintain a tightening bias. “While India tends to have relatively high inflation expectations, they fall within its +/- 2% target range," it added.

CPI inflation in FY2017-18 is estimated at 3.6%, close to the midpoint of the target band (4%±2%), reflecting low food price inflation in the first half of the year. Medium-term headline CPI inflation is forecast to remain within but closer to the upper bound of the Reserve Bank of India’s inflation-targeting band (4% ±2%).

The multilateral crisis lending body said Indian economy is recovering from temporary disruptions from the November 2016 currency exchange initiative and the GST rollout in July 2017. Growth rebounded strongly to 7.2% in the third quarter of FY2017-18, up from 6.1% in the first half of the fiscal year.

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IMF has projected India’s growth to recover to 7.4% in FY2018-19 from an estimated 6.7% in FY2017-18, a tad higher than 6.6% estimated by government’s statistics body, thus “making India once again one of the region’s fastest-growing economies".

“The recovery is expected to be underpinned by a rebound from transitory shocks as well as robust private consumption," IMF said.

IMF said India’s medium-term growth prospects remain positive, benefiting from key structural reforms, including the GST reform. “The current account deficit in FY2017/18 is expected to widen somewhat but should remain modest, financed by robust foreign direct investment inflows," it added.

In its bi-annual World Economic Outlook released last month, IMF said India should address labour market rigidities to create more jobs and undertake financial sector reforms to improve governance in public sector banks to contain downside risks to its medium-term growth prospects.

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