While optimistic about the prospects for India?s growth and ability to contain inflation, The World Economic Outlook released by the International Monetary Fund (IMF) this week strikes a note of caution on high food prices and external controls to reduce capital inflows. Though the IMF has revised growth projections down to 8.9% in 2007, the report notes that expansion has been primarily induced by gains in domestic demand, especially for investment. It says future upside possibilities remain robust as corporate profits further enhance investments. India?s high growth had both positive and negative implications for the global economy, the IMF notes. On the positive side, the growing economic clout is evidenced by its roughly 10% contribution to global growth in terms of PPP weights (next only to China) and 5% on the basis of market weights. However, on the negative side, rapid growth has made India the world?s fourth-largest contributor to the increase in oil consumption. Striking an optimistic note, the report says jatropha-based bio-diesel developed in India may be cheaper and emerge as one of the most efficient alternative fuels under development.
On inflation, too, the IMF expresses optimism as it expects consumer price increases to drop from 6.2% in 2007 to 4.4% in 2008. But it cautions of downside risks for a number of reasons: high levels of core inflation, rapid credit growth and the sharp rise in equity prices. These are certainly aspects that Reserve Bank of India will take into consideration when debating monetary policy at its meeting at the end of the month. Furthermore, the IMF strikes a note of caution by warning that the robust demand for bio-fuels has had a buoyant impact on global food prices and India?s interest could be impacted. The report is not too optimistic either about the impact of India?s efforts to contain exchange rate appreciation, especially by containing capital inflows. Pointing out that such measures would have a diminishing impact as new ways to elude controls crop up, it notes that efforts to liberalise restrictions on capital outflows can prove useful and a more effective tool would be the use of fiscal expenditure restraints, especially in countries like India where further consolidation is needed despite the gains already achieved. This is certainly advice that North Block would do well to heed.
