The good news is that the International Monetary Fund (IMF) now thinks the Indian economy will grow by 9.7 per cent in 2010. The bad news is that this blistering pace is not likely to be repeated next year. The IMF’s latest world economic outlook raises India’s growth prospects by nearly a third of a percentage point from its July forecast. But it retains the prediction for 2011 at 8.4 per cent.
It talks about how India’s “low reliance on exports, accommodative policies, and strong capital inflows have supported growth”. None of these conditions will, however, endure. First, the trade balance — India shrugged off the financial crisis because its imports slowed down faster than its exports — will return to negative next year as capacity-building stokes demand for imported plant and machinery. Strong domestic demand may have seen us through when global trade shrank, but once it revives, India will be back among the also-rans in the exports race.
Second, the policy environment cannot stay as benign as it is without affecting India’s macro-economic health. Both fiscal risks as well as inflationary pressures have built up after two years of demand stimulation. The IMF feels the government needs to tighten its belt when Indians are furiously buying everything from cellphones to cars. The world at large is yet to recover from the financial meltdown and unless India becomes fiscally prudent, it may run out of moves if markets are spooked by further bad news. India’s monetary stance is neutral after a series of rate hikes. This, the IMF says, should be accompanied by a rising rupee to help offset inflation, discourage speculative inflows, and support the rebalancing of how the East and West buy and save.
Finally, India’s response to the surge in capital inflows — alongside the rest of emerging Asia where such flows have quadrupled from two years ago — has been to accumulate foreign exchange rather than allow the rupee to appreciate, and to keep a sharper lookout for price bubbles. The IMF finds this approach inadequate. “The best response to capital inflows may be a coordinated one, especially when they are driven by global factors or have global implications.” Any single country that tries to manage the flow by either allowing its currency to rise or by building taller walls will merely divert the money to other destinations. It would be best if all of Asia were to put their heads together on what needs to be done about the dollar tide it is awash in.
{{/usCountry}}Finally, India’s response to the surge in capital inflows — alongside the rest of emerging Asia where such flows have quadrupled from two years ago — has been to accumulate foreign exchange rather than allow the rupee to appreciate, and to keep a sharper lookout for price bubbles. The IMF finds this approach inadequate. “The best response to capital inflows may be a coordinated one, especially when they are driven by global factors or have global implications.” Any single country that tries to manage the flow by either allowing its currency to rise or by building taller walls will merely divert the money to other destinations. It would be best if all of Asia were to put their heads together on what needs to be done about the dollar tide it is awash in.
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