Recovering rapidly from the global financial crisis, India is poised to grow at 8 per cent this year, but inflation and excessive capital flows could pose a challenge, a gathering of world finance ministers was told on Saturday.
"Current estimates are that real GDP had grown at 7.2 per cent during the just completed fiscal year 2009-10, up from 6.7 per cent during 2008-09," Reserve Bank of India (RBI) Governor D Subbarao told the steering committee of the 186-nation International Monetary Fund (IMF).
For policy purposes, the RBI has placed the baseline projection of real GDP growth for 2010-11 at 8 per cent with an upside bias, he said as the committee held a day-long meeting as part of the regular spring gathering of the IMF and World Bank.
Subbarao took the floor on behalf of Finance Minister Pranab Mukherjee, who represents Bangladesh, Bhutan, India and Sri Lanka on the International Monetary and Financial Committee.
The monetary and fiscal stimulus measures initiated in the wake of the global financial crisis played an important role, in both mitigating the adverse impact of the crisis and ensuring rapid recovery, he said.
"The developments on the inflation front, however, are worrisome," Subbarao said noting "inflation, which was earlier driven entirely by supply side factors, is now getting increasingly generalised".
In view of the inflation risk, RBI had embarked on a calibrated exit from the expansionary monetary policy, while the central budget of 2010-11 has begun the process of fiscal consolidation by programming reductions in the revenue and fiscal deficits, he said.
Subbarao said conduct of monetary policy will continue to condition and contain perception of inflation in the range of 4-4.5 per cent, in line with the medium-term objective of 3 per cent inflation consistent with India's broader integration into the global economy.
However accommodative monetary policies in the advanced economies, coupled with better growth prospects in India, could trigger large capital flows into the country, he said.
"While the absorptive capacity of the Indian economy has been increasing, excessive flows pose a challenge for exchange rate and monetary management," he said.
Going forward, three major uncertainties cloud the outlook for inflation, Subbarao said. "First, the prospects of the monsoon in 2010-11 are not yet clear. Second, crude prices continue to be volatile. Third, there is evidence of demand side pressures building up."
On balance, keeping in view domestic demand-supply balance and the global trend in commodity prices, the baseline projection for WPI inflation for March 2011 is placed at 5.5 per cent.