Indian Prime Minister, Manmohan Singh, meeting the President of Turkey, Abdullah Gul, in New Delhi, Tuesday February 09, 2010.

India was one of the first countries to emerge from the global crisis, but Asia’s third largest economy is now facing policy trade-offs earlier than other countries and should return to its longer-term reform agenda, according to the IMF.

Advancing the financial reform agenda is viewed as critical to enable the big infrastructure boost that the government is planning to sustain rapid growth over the medium term. In its annual review of the Indian economy, the Fund projects the country’s growth will rise from 6 ¾ percent in 2009/10 to 8 percent the following year, off the back of an expected pick-up in private consumption and investment. “We believe this recovery will be driven by both private investment and consumption because corporate profits and employment prospects have recovered well,” said the IMF’s mission chief for India, Kalpana Kochhar.

“With India’s long-term prospects remaining strong and private sector balance sheets sound, we expect growth to be back at potential in 2010/11, even if advanced economies grow below trend, “ she added.

Exiting from stimulus:But alongside recovery, India’s policymakers are facing new challenges. Inflation is rising, partly due to increased food prices, but also because of demand pressures. In recent years, food production has failed to keep up with increased demand and this trend has been intensified by the poor monsoon and the cyclical recovery from the crisis.

With signs of the recovery becoming well entrenched, the IMF said that conditions were “ripe for a progressive normalization of the monetary stance.” It welcomed the recent decision by the Reserve Bank of India (RBI) to begin the process of monetary tightening, and called for a further gradual withdrawal of monetary accommodation that “will require fine judgments by the RBI.”

During the global crisis, India benefited from fiscal stimulus which was already in the pipeline and the authorities responded to the downturn with further injections of fiscal and monetary stimulus. But this has left the country with a double-digit deficit and public debt stands at close to 80 percent—one the highest levels in the emerging world.

Tackling the deficit:The IMF welcomed measures announced by the Indian authorities to tackle the country’s ballooning deficit starting from the next budget. New Delhi plans to reduce the central government deficit by 1½ percentage points to 5½ percent of GDP in 2010, but further measures could be necessary, said the IMF’s mission chief.

“The authorities have some far-reaching revenue reforms in the pipeline which will certainly help in reducing the fiscal deficit by improving efficiency and compliance, but equally important is for them to implement reforms on the expenditure side,” said Kochhar.

She highlighted, in particular, the pressing need to tackle the inequitable distribution of subsidies. “Phasing out subsidies that mostly benefit the well-off while targeting support to the poor more directly, is not merely good for the bottom line, it is also necessary for social justice,” Kochhar added.

Financial sector reform:The IMF has identified the need for financial sector reforms to facilitate infrastructure investment and fiscal consolidation.

Currently, commercial banks in India are limited in what they can do because of the short-term nature of their deposits set against the long-term and risky needs of infrastructure projects.

“A deepening and widening of the financial system, including the further development of the corporate bond markets, are possible solutions. This would in turn require unshackling domestic institutional investors, and enhancing the role of foreign investors,” said Kochhar.

Video

India’s budget deficit, forecast at 6.8% of GDP (gross domestic product) by March 31, a 16-year high, is a “bigger risk” to economic prospects than any other factor, central bank Governor Duvvuri Subbarao said last month when he raised the proportion of deposits that lenders need to maintain as cash reserves to 5.75% from 5% to contain inflation.

“In the near term, I am more bullish on India than China as I see the Indian government fulfilling our budget expectations,”Stephen S Roach, chairman of Morgan Stanley Asia, told reporters in Mumbai on Tuesday. Finance Minister Pranab Mukherjee will present the Budget on February 26th and Roach’s expectations include cut down on fiscal deficit by 1.3% to bring it 5.5% of GDP.

“In infrastructure, Minister of Road Transport and Highways Kamal Nath has set a goal of investing $20 billion in road construction in the next five years. It may sound ambitious, but shows the intentions of the government,”said Roach. He expects more government companies to be divested to raise resources and rollout fast-paced tax reforms.

Morgan Stanley: Feb, 2010; India towards higher growth path

SEE: Finfacts article, Dec 2009: India has youngest workforce among large economies; Demographics necessary for strong growth but insufficient condition

Irish trade with India is insignificant.

Merchandise exports account for 0.2% of the toal and we export more to countries such as Thailand and Hungary.

Service exports are also derisory.