India's economy gradually recovering, but beware of inflation: IMF

The International Monetary Fund (IMF) said India’s economy is gradually recovering after it was hit by two Covid waves, but it cautioned the authorities against inflationary pressures. The agency recommended slow reduction in monetary policy support as recovery gains ground.


The IMF said while the impact of Covid-19 on investment and human capital could prolong the recovery and affect medium-term growth, the recovery could also be faster than expected because of the pace of vaccination and economic reforms.


In its annual report on India under Article IV, the IMF’s executive board said the economic outlook remains clouded because of pandemic-related uncertainties contributing to both downside and upside risks.


“The second wave resulted in another sharp fall in activity, albeit smaller and shorter and recently high frequency indicators suggest an ongoing recovery,” it said.


It warned that a persistent negative impact of Covid-19 on investment, human capital, and other growth drivers could prolong the recovery and impact medium-term growth. While India benefits from favourable demographics, disruption to access to education and training due to the pandemic could weigh on improvements in human capital.


However, it said, “faster vaccination and better therapeutics could help contain the spread and limit the impact of the pandemic”.


Additionally, successful implementation of the announced wide-ranging structural reforms could increase India’s growth potential, the board said in its report released on Friday.


It agreed that maintaining an accommodative monetary policy remains appropriate.


“Looking ahead, a well-communicated plan for a gradual reduction in monetary policy support as the recovery strengthens would foster orderly market transitions,” it said. The Fund said despite policy support, bank credit growth has remained subdued even as large corporates have benefited from easier conditions in capital markets.


The IMF projected India’s economic growth at 9.5 per cent for the current financial year and the headline consumer price inflation-based inflation at 5.6 per cent amid elevated price pressures.


It said inflationary pressures have been elevated, yet the rate of price rise eased to 5.6 per cent in July, returning to within the Reserve Bank of India’s (RBI’s) target, driven by softer food prices and base effects. Since then, the headline inflation rate fell to 5.3 per cent in August and 4.3 per cent in September, according to official data.

The Fund said the contraction in economic activity, lower revenue, and pandemic-related support measures are estimated to have led to a widening of the Centre’s fiscal deficit to 8.6 per cent of gross domestic product in 2020-21. The general deficit of both the Centre and the states stood at 12.8 per cent that year.

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