IMF recommendations on predictable lines

The assessment by the International Monetary Fund (IMF) economists – known as the Article IV consultation – has predictably laid bare a raft of structural and financial sector reforms, despite the fact that after China, India is one of the handful of countries logging high growth this fiscal to border on pre-crisis growth pattern.

Even as the Fund foresees India's real gross domestic product (GDP) recording 8.75 per cent in 2010-11, the penultimate year of the Eleventh Plan, underpinned by “high investment in infrastructure and productivity gains”, this has not detracted the multilateral multibillion bailout body from focusing on fiscal consolidation as the crucial tool to manage the corking pressures built into the robustly growing economy.

While backing the Indian authorities ‘policy of exiting from the stimulus implemented in the past two years, the cryptic statement by the IMF's mission chief for India, Mr Masahiko Takeda, that “a more rapid withdrawal of fiscal stimulus at an earlier stage would have helped contain demand, but in its absence a greater burden falls on monetary policy to cool the economy and counter the perception that inflation has shifted to a higher level” strikes a discordant note as stimulus measures would not have been removed at the height of the crisis.

IMF right to be sceptical

A point to ponder from the “lender of the last resort”, as the IMF has been described by countries affected by the world financial meltdown since 2007, is its serious concern over the ‘elevated level of inflation' in India. Even as the Prime Minister's Economic Advisory Council Chairman Dr C. Rangarajan optimistically asserted that inflation will come down to 6 per cent by March 2011, the Fund begs to differ, and rightly so. “With little or no spare capacity in the economy, coupled with the threat of rising food prices, inflation is currently elevated in the range of 8.5 to 10.5 per cent. Inflation is expected to come down slowly as last year's high food prices caused by poor rainfall drop out of the inflation calculation, but underlying price pressures are still strong.”

With even vegetable prices hitting the roof and food inflation at 18 per cent, on top of the relentless rise in fuel prices that have cost-push effect, the domestic policy mandarins' sanguine hope on the price front appears chimerical. That is precisely the reason why the IMF report favours further tightening monetary policy to meet the authorities' inflation objectives and anchor inflation expectations.

geeyes@thehindu.co.in

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