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IMF commends India's continued outstanding economic performance


India's economy has continued to grow above trend, with average growth of 8 percent in the last three years. Growth is broad based, with robust consumption, investment, and exports. With manufacturing expanding at over 10 percent y/y, industry has joined services as an engine of growth. A normal monsoon is supporting agriculture. Staff projects growth of about 9 percent this year, further moderating toward trend in 2007/08. WPI inflation is contained within the RBI's indicative projection range of 5-5½ percent, partly reflecting gradual hikes in policy rates since late 2005, limited pass-through of higher world oil prices to domestic LPG and kerosene, and cuts in import duties. However, high food prices are contributing to CPI inflation (industrial workers) exceeding 6 percent. Staff projects WPI inflation to remain in the 5-5½ percent range in the near term.

The investment recovery and consumption boom continue to widen the external current account deficit. In 2005/06, buoyant imports have offset rising goods and services exports, pushing up the trade deficit to 6½ percent of GDP and the current account deficit to 1¼ percent of GDP. While exports are growing apace, robust domestic demand is expected to contribute to a further widening in both deficits this year.

Strong capital inflows comfortably financed the current account deficit. In 2005/06, inflows remained dominated by portfolio flows and external commercial borrowings, particularly convertible bonds. While gross FDI inflows have begun to rise, they have been partly offset by a pickup in outward investment by Indian corporates. So far this fiscal year, capital inflows have remained strong and reserve coverage has remained stable at around 7½ months of imports of goods and services. While more reliance on debt and portfolio inflows has increased exposures to changes in international investor sentiment, India's large reserves and low external debt limit this risk.

The exchange rate has exhibited two-way flexibility and in real effective terms is broadly around its 2004/05 level. In the first half of 2006, the rupee depreciated against the U.S. dollar, against a backdrop of tightening global liquidity and a widening current account deficit. The RBI limited its intervention in foreign exchange markets to easing exchange rate volatility and smoothing domestic liquidity pressures that arose from the redemption of external bonds. Since then the rupee has regained ground against the dollar and the RBI continued to intervene only occasionally, both buying and selling dollars.

Financial markets continue to soar. Net foreign investor inflows rebounded after the May/June 2006 stock market correction and stock prices recovered smartly, reaching new historical highs. PE ratios are now high relative to other countries and India's recent past. Meanwhile, real estate prices continue to grow at a rapid clip on the back of a credit boom. To curb speculative pressures, the RBI has tightened prudential standards further, including by raising general provisioning requirements and boosting risk-weights on high-growth areas, including real estate, to above Basel norms. Indicators of financial soundness (backward looking) suggest that banks' balance sheets and income remain healthy.

Following three years of reduced deficits, fiscal consolidation "paused" in 2005/06. The general government deficit was broadly unchanged at around 7½ percent of GDP, with a modestly rising central government deficit broadly offset by a falling states deficit. All but five states enacted fiscal responsibility laws (FRLs) and nine states subsequently received debt relief under the new facility introduced last year by the Twelfth Finance Commission. General government debt remains high—over 80 percent of GDP—reflecting both budget deficits and off-budget subsidies for oil and food. Consolidation has resumed in 2006/07. The state and central government budget deficit targets of 2.7 percent of GDP and 3.8 percent of GDP, respectively, are consistent with the minimum reductions required under their fiscal responsibility legislations. Staff projects the general government deficit to overperform budget estimates by 0.2 percent of GDP on the back of strong revenue growth.

Executive Directors commended the authorities on India's continued outstanding economic performance—reflected inter alia in strong growth, enhanced resilience to shocks, and increasing integration with the global economy .....Read Executive Board Assessment

(This is sourced from Public Information Notice (PIN) of IMF)

Indian economy has responded well to the reforms
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