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IMF warns India of higher inflation if growth accelerates

business Updated: Dec 03, 2010 02:19 IST
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The International Monetary Fund (IMF) on Thursday cautioned India that its economy growing at a faster clip than the current level could aggravate inflation.

IMF Managing Director Dominique Strauss-Kahn said if economy grows faster than the current pace, it could could create some risk in current account deficit situation as well.

Observing that no one is certain when another crisis will hit the global economy, Strauss-Kahn also advised the government to use the higher tax collections for fiscal consolidation.

Amid media reports that Planning Commission Deputy Chairman Montek Singh Ahluwalia may in the race for the top-most position in IMF, Strauss-Kahn said he favoured someone from outside the US and Europe to head the multilateral agencies --International Monetary Fund (IMF) and the World Bank.

He met Prime Minister Manmohan Singh, Finance Minister Pranab Mukherjee and senior officials and industry leaders during his one-day visit to India.

On the issue of sustained capital inflows, the he said the foreign money will help India improve its infrastructure.

"The forecast we had in the IMF is exactly what you are following now which is probably the maximum that the Indian economy can provide these days so you are running as fast as you can. More will be probably too much because more will create some risk on inflation side, also on current account side," Strauss-Kahn said.

The remarks assume importance in the back of India recording 8.9 per cent growth in the first half. The government is likely to revise upwards its growth projection for this fiscal from 8.5 per cent.

"We had earlier given a projection of 8.5 per cent. We will revise it. It is very very likely that it will be revised a little bit (upwards)," Chief Economic Adviser Kaushik Basu said on sidelines of interactive session with the IMF head.

On the other hand, inflation has also started coming down. Food inflation has softened to single digit after four months to 8.6 per cent during the week ended November 20.

Overall inflation has also declined to 8.58 per cent in October from 8.62 in September.

India's current account deficit, representing net flow of income out of the country barring capital movements, surged three-fold to 13.7 billion dollars in the April-June quarter over the same period last year.

On fiscal consolidation, IMF Chief said, "The main challenge is to use fruits of high growth to come back to fiscal side. It is time to maintain fiscal buffer because you don't know when will another crisis will come."

He said one of the lessons of this crisis is very clear--that is the value of fiscal space.

"That is very important for India because India's commitment to ambitious medium term deficit and debt reduction target is very important," he said.