India is expected to grow by 8.75 per cent in the fiscal year ending March 2008, the International Monetary Fund said on Monday, but cautioned that inflation risks remain due to rising global food and fuel prices.
Indian policymakers expect growth close to 9.0 per cent in the current fiscal year and the statistics office will release the first official estimate for gross domestic product growth for 2007/08 on February 7.
"India's economy has been resilient in the face of heightened global uncertainties, slowing US growth and high world oil prices, and is expected to expand by 8.75 per cent this fiscal year as a result of rising productivity and investment," the IMF said in a report summarising its annual consultation on India's economic policy.
Officials in New Delhi maintain that Asia's third-largest economy can sustain annual growth of 9.0-9.5 per cent but a global financial crisis could dent expansion.
The IMF said the widely watched wholesale price inflation rate was projected to remain between 3.5-4.0 per cent in the near term.
But inflation risks were on the upside due to rising international food and fuel prices, ample domestic liquidity, tight capacity utilisation and rising skill premia.
A top government panel has said a slowdown among developed economies may not have a major impact on India but pressure from high oil and food prices would make managing inflation a challenge in 2008/09.
The IMF directors called for more rapid fiscal consolidation despite buoyancy in tax revenues, as public spending and debt were still relatively high.
India has been grappling with the problem of large capital inflows, which pushed the rupee up more than 12 per cent against the dollar last year, denting exporters' competitiveness in foreign markets.
The IMF report also said a tighter fiscal policy could help offset the liquidity impact of buoyant capital inflows and relieve appreciation pressures.
Some directors cautioned against restrictions on capital inflows, emphasising that increased exchange rate flexibility, strengthened monetary operations, and effective communications with markets could be a better way to increase the effectiveness of monetary policy.
The IMF urged greater progress in structural reforms to boost productivity and competitiveness and to ensure that the benefits of growth are widely shared.