IMF’s Higher Growth Rate for India is in SYNC

Ashok Handoo*

After a 7.4 percent GDP growth in the last financial year, it is now likely to be 9.5 percent this year. That is what the International Monetary Fund (IMF) has projected for India. This projection is higher than IMF’s own April estimates, which put it at 8.8 percent and much more than the estimate made by Reserve Bank of India at 8 per cent and the Government’s estimate of 8.5 percent. The logic given by the IMF is that India has a better investment environment and robust corporate profits.

The revised projections seem to be in sync with what has been going on in the Indian economy, currently. Industrial production growth was in double digits consistently for the last 8 months, though in May it came down to 11.5 percent, the lowest. Consumer durables output grew by about 30 percent for the last six months, direct tax collections have jumped by 16 percent, indirect tax collections have shot up by a whopping 43 percent and the exports have increased substantially. Robust excise collections in May indicate a strong pick up in investment. Corporate tax collections grew by 21.7 per cent. Growth rate in the first two quarters has been 8.6 percent so far. In short, the economic environment is booming all around.

In fact, the IMF has revised its estimate of growth for Asia as well, from 6.5 per cent to 7.5 percent. The global growth is put at 4.5 per cent.

The ‘World Economic Outlook’ of the IMF in which the projections have been made, also says that in 2011 India’s growth will be at 8.5 percent because by then the economic measures undertaken by different countries during the global downturn would have run a full cycle and most of the countries would have withdrawn the stimulus packages. Asia’s growth rate will thus stabilize at a more “moderate but sustained growth of 6.75 percent,” it said. The World growth rate would stabilize at 4.25 percent.

While making these projections the Fund has put some caveats as well. It says the outcome will depend upon “how Europe deals with its fiscal problems, how the advanced countries mange their fiscal consolidation and how the emerging market countries balance their economies”. As far as the European Debt Crisis is concerned it has not affected India much so far, though within Europe it has extended from Greece to Portugal and Spain. Despite this, uncertainties do prevail. As the Chief Economist of the IMF, Olivier Blanchard put it “While we remain cautiously optimistic about the pace of recovery, there are dangers ahead”.

Indian growth is much more dependent upon the monsoon factor, which affects growth in the agricultural sector. Fortunately, we are receiving good rains this year, though the accompanying floods in some areas can disturb production in the short run. The overall deficit in rainfall has also come down from 16 percent to 10 percent now. Even though agriculture contributes only about 18 percent to the GDP, it has special importance in India because it is widely dispersed and bulk of our population depends on this sector, both directly and indirectly. That is why the industrial sector also looks up to agriculture for its own growth.

Indian growth rate is only next to China, for which the IMF has made a projection of 10.5 percent this year. Strong domestic demand has been one important factor that has seen India through, during the global recession in the last two years, when many countries actually saw a negative growth. Boosting this demand through stimulus packages and fiscal and monetary measures has been the corner stone of our economic policy during this period. While it has stood us in good stead to deal with the situation, it has also boosted inflationary pressures. It is, therefore, time now to return to normal times in a calibrated manner. The RBI has been raising both Repo and Reverse Repo rates, the interest rates at which RBI lends and obtains finances from other banks, to bring down liquidity and thus reduce inflation.

The interest-free infrastructure bonds that are being floated will fetch the Government about $500 billion in the 11^th Five Year Plan ending March 2012 and much more thereafter. Since the bonds are for a 10-year period with a lock-in period of five years, the money will remain with the Government for a long period. The excise duties granted earlier are also being withdrawn in a phased manner. The 3-G auction yield will also help reduce fiscal deficit.

The Government is confident that the inflation rate which has touched the double digit mark will come down substantially by the end of this year. It also hopes to bring down fiscal deficit to 5.5 percent of GDP by then. Food inflation, which is a bigger worry, too is expected to come down as soon as the new crops come to the market. At present it is at 12.63 percent after registering a steep fall of 3 percent last month.

Economists believe that food inflation will continue to remain high for some time due to the impact of recent rise in fuel prices, though the government believes that it would not be more than 9 percent.

What India is doing, has been acknowledged as the correct course even at the recently concluded G-29 Summit in Torranto, Canada. World leaders there unanimously agreed that return to normal economies has to be undertaken with caution and in a gradual manner.

Higher growth rate will naturally mean more jobs and higher returns on investment, which is bound to give a further push to investment activities. There is, therefore, a reason to be optimistic.

*Freelance Writer