The International Monetary Fund (IMF) has said India?s Budget 2012-13 should restrict itself to giving indirect tax set-offs and provide incentives for infrastructure projects rather than adding to the volume of subsidies.

The IMF caution is part of the updates on Global Economic Outlook and Financial Stability Report released late on Monday. The report is expected to be factored in by the finance ministry, which has began drafting the annual Economic Survey to be presented just before the Budget is tabled by the finance minister in the Lok Sabha in March.

It says the RBI should be cautious about loosening monetary policy, and the finance ministry about expanding fiscal support for the economy as deficits and inflation levels are still high.

The comments about India are in the context of the global economic order that the IMF expects for 2012. IMF?s global growth estimates at 3.3% are more optimistic than the World Bank numbers of 2.5%.

But the numbers are 0.7 percentage point lower than the fund?s own projections for 2012 released in September in the World Economic Outlook. For India, the estimate is 7% (that means three quarters of 2012-13) which too is 0.5 percentage point down from the September estimates. The China numbers are expected to come in at 8.2%, again 0.8 percentage point below earlier estimates.

While one could quibble about the size, of more concern is the trend in world trade volumes, including goods and services. The IMF has projected a sharp 2% drop in this estimate to 3.8%. Exports from and imports to developing countries including India and China are likely to drop.

A decline in world trade will have a medium-term impact on growth rates for the economy and so, the drop is more of a scare. However, the slowdown is expected to keep the price of oil too low. Prices, which had risen almost 32% in 2011, are expected to decline by close to 5% in 2012.

According to the IMF, the headwinds emerge from the euro area. The euro zone, it said, ?is now expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation?.

The impact will be on banks as European ones pull back from cross-border lending ? especially trade finance ? and renewed pressure on local stock markets as foreign funds depart. The remedy? Keep the foreign exchange reserves large, the fiscal deficit down and debt level at manageable limits.