The International Monetary Fund's most recent assessment of the Indian economy is broadly in line with those of the Government of India and the Reserve Bank of India. The economy is expected to grow at a robust rate of 8.75 per cent this year and moderate to around 8 per cent during 2011-12. Since mid-2009, the pace of recovery, which is led by domestic demand, has been strong. Monetary and fiscal policies have been accommodative and the real interest rates have remained low. But, despite some attempts at fiscal consolidation, the fiscal deficit is high. There are other near-time challenges, high inflation being the most significant one. A few days after the release of the IMF report, food inflation shot up to 18.22 per cent. There is very little slack in the economy and this has spurred inflation in manufactured goods. The high food prices are due to supply side factors as well as a structural shift in the consumption patterns. As the RBI pointed out, the consumption of milk, eggs, meat, and other protein-rich items has increased and their prices have moderated less than those of cereals and pulses. It is highly unlikely that the year-end inflation targets will be achieved.
The IMF expects India's growth prospects to remain strong over the medium term. Rapid growth is expected to be supported by high investment and productivity gains. Most of the downside risks relate to the global economy. Surging capital inflows could spur further investment, but could also complicate macroeconomic management. Sustaining rapid growth over the medium term will depend, among others, on efforts to facilitate infrastructure investment — such as deepening the corporate bond market and lowering the cost of doing business. It is equally important to improve social indicators, even while carrying out fiscal consolidation. Few will disagree with the IMF's view that improving social outcomes and strengthening infrastructure are the two key pillars of a strategy to achieve rapid and inclusive growth in India. India's banking system is resilient and well capitalised. However, there is a need to constantly monitor asset quality especially when prudential norms for infrastructure are eased.
