Washington, Oct 7 (Calcutta Tube) Even as the world slowly recovers from its worst economic crisis in decades, the International Monetary Fund (IMF) Wednesday raised India’s projected growth to 9.7 percent in 2010 and 8.4 percent in 2011, led increasingly by domestic demand.
‘India’s macroeconomic performance has also been vigorous, with industrial production at a two-year high,’ it said raising Indian growth estimate by 0.3 percentage points in its latest World Economic Outlook (WEO) ahead of the annual meetings of the IMF and the World Bank Group here over the weekend.
‘Leading indicators – the production manufacturing index and measures of business and consumer confidence – continue to point up’ in India, said the WEO while around the world ‘thus far, economic recovery is proceeding broadly as expected, although downside risks remain elevated’.
With most advanced and a few emerging economies still facing major adjustments and the financial sector still vulnerable to shocks, IMF said ‘global activity is forecast to expand by 4.8 percent in 2010 and 4.2 percent in 2011, with a temporary slowdown during the second half of 2010 and the first half of 2011.’
While output ‘of emerging and developing economies is projected to expand at rates of 7.1 percent and 6.4 percent in 2010 and 2011, respectively’, in advanced economies, however, it projected growth to be only 2.7 percent and 2.2 percent, respectively.
In the case of India ‘robust corporate profits and favourable external financing will encourage investment’, the IMF said noting recent activity (10 percent year-over-year growth in real GDP at market prices in the second quarter) was driven largely by investment.
But the contribution from net exports is projected to turn negative in 2011, as the strength in investment further boosts imports, it said noting ‘that the rapid pace of domestic activity, evidenced by rapidly rising inflation, led the central bank to increase the repo policy rate, in steps, by a cumulative 125 basis points’.
Growth in emerging Asia as a whole reached about 9.5 percent, as robust domestic demand spread from China, India, and Indonesia to other Asian economies, the IMF said.
A number of emerging economies have effected monetary tightening, with rate hikes (Brazil, India, Malaysia, Peru), increased cash reserve requirements (China, India, Turkey), or direct limits on credit growth (China).
The tightening is expected to proceed at a gradual pace, as inflation is generally projected to be contained. The more pressing concern in a few economies is high credit growth for real estate purchases, IMF said.
Inflation is projected in general to stay low amid continued excess capacity and high unemployment. The recovery of commodity prices, however, has raised the level of consumer prices during 2010, it said.
With market indicators suggesting that commodity prices should remain stable and with downward pressure on wages gradually diminishing, headline and core inflation in advanced economies should converge to about 1.25 percent in 2011 and in emerging and developing economies to about 5 percent.
Among some major emerging economies, capacity constraints are beginning to boost prices: Brazil, for example, has experienced gradual increases in inflation pressure, while India has seen a sharp rise in inflation.
Stressing the need to strike a balance between supporting a self-sustained recovery in private activity over the near and medium term and avoiding fiscal risk or overheating pressure, the IMF suggested: ‘Fiscal policy – in particular the unwinding of stimulus -needs to be carefully calibrated.’
(Arun Kumar can be contacted at firstname.lastname@example.org)