The International Monetary Fund (IMF) has said India should start withdrawing the stimulus — monetary as well as fiscal — because the economic recovery has started gaining momentum. It suggested there should be further tightening of the monetary policy to contain inflation and that the process of fiscal consolidation should start from the upcoming Budget.
“We believe there are a lot of indications already in the pipeline that suggest recovery will, in fact, occur and will broaden... We do believe it is time to unwind the stimulus measures that were put in place last year,” Kalpana Kochhar, India mission chief at IMF, said at a conference call on Thursday.
The multilateral lender, which projected growth in India to reach 6.75 per cent in 2009-10 and 8 per cent in 2010-11, said it was timely to withdraw monetary and fiscal stimulus, as the growth was becoming more broad-based and all key indicators were hinting that the recovery would continue.
“More importantly, with the debt burden so high, it actually constrains the space for very essential fiscal spending that the government needs to do, including on poverty and its goals of inclusiveness. So, it does need to reduce the deficit in order to make space for essential spending,” Kochhar added.
IMF projected the wholesale inflation rate would touch 8 per cent by March, and then ease to 5.5 per cent by the end of 2010-11. The inflation rate rose to 7.31 per cent in December, forcing the Reserve Bank of India to increase the cash reserve ratio by 75 basis points.
“Along with the recovery, we’ve seen an upward rise in prices. Inflation has picked up. Some of it is due to food, but some of it is also due to demand pressures…. Given current trends, there should be further gradual withdrawal of monetary accommodation,” she said.
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India was one of the first countries to recover from the crisis as it benefited from normalisation of the global economic conditions, as well as the stimulus measures. The stimulus supported economic activity, but it also increased the fiscal deficit.
“We recommend that the fiscal adjustment strategy begin with this Budget, which the finance minister has already announced will happen, and we believe it should be anchored on a debt target along with some nominal expenditure rules,” Kochhar said, adding IMF would like India to see measures on the expenditure side, particularly subsidy reforms.