The International Monetary Fund (IMF) has projected an 8.75-per cent GDP growth for India during the current fiscal, which is 25 basis points higher compared to Reserve Bank of India's projected GDP peg of 8.5 per cent in 2007-08.

In its recently published report titled, India - An Assessment Letter, though the IMF has forecast headline inflation (WPI) at around three per cent in its near term projections, the Reserve Bank of India's third quarter review of annual statement on monetary policy, however, estimates India's WPI-based inflation on a year-on-year basis stood at 3.8 per cent as on 12 January 2008.

That the RBI is also in tune with the IMF is evident from its pronouncement that the "policy endeavour (RBI) would contain inflation close to five per cent in 2007-08 while conditioning expectations in the range of 4-4.5 per cent so that an inflation rate of around of three per cent becomes a medium-term objective". 

According to the IMF, India's external current account deficit is expected to widen to about two per cent of GDP in 2007-08 against the backdrop of strengthened rupee and slowing global growth. "The deficit is comfortably financed by private infows". The report observes that India's financial markets have "largely recovered from corrections during the summer's credit-market turbulence, with the Sensex ranging near record highs. India's strong economic performance is the consequence of steady reforms over the past 16 years, though more remains to be done to sustain that performance going forward".

It might be pertinent to point out that India's foreign exchange reserves have exceeded $260 billion and its external debt also remains low.

The IMF has advocated that the immediate macroeconomic policy challenge for India is managing the effects of rapid capital inflows. The report states that India's bright economic prospects have driven inflows, which in turn gave rise to rupee appreciation and excess liquidity.  It said while India's monetary policy could remain on hold for now since the WPI inflation is low, but in view of rapid monetary growth, the "vigilance for inflationary pressures is warranted".

According to the IMF study, India's high government debt needs to be brought down and fiscal space made for social and infrastructure spending. The "general government debt" remains very high - nearly 80 per cent of GDP - thus limiting the room for priority spending. The IMF has projected an "on-budget" government deficit of 5.7 per cent during 2007-08 on the back of buoyant revenues and "improved state level finances".

However, said IMF, the "off-budget" subsidies for food, fuel and fertilizer projected to be about one per cent of GDP in the current fiscal will "slow consolidation with upside risks to fuel subsidies if oil prices range higher". The IMF has prescribed that for the medium term comprehensive revenue and expenditure reforms are needed including streamlining of tax exemptions and better targeting of subsidies.

Emphasising that India should prepare its financial market for a "more open" capital account, the IMF also underscored the need for greater progress in structural reforms to tackle supply constraints, create jobs and further reduce poverty. Stressing on investments in health, education and infrastructure, IMF said trade tariffs could be further reduced to enhance competition and reduce the cost of imported inputs, building on the trend in recent years. "In addition, steps to develop corporate bond and derivatives markets would facilitate investment and enable better risk management as the capital account opens further".

Meanwhile, referring to the context of a more open capital account, the RBI said "public policy preference for a hierarchy of capital flows with a priority for more stable components could necessitate a more holistic approach, combining sectoral regulations with broader measures to enhance the quality of flows that make the source of flows transparent".

Overall, said IMF, prospects for India's growth and macroeconomic stability remain good and a higher growth path could be achieved by accelerating key reforms.