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IMF projects 8 p.c. medium term growth for India

NEW DELHI: Even as the Planning Commission has proposed an overall economic growth of nine per cent for the Eleventh Plan (2007-12), the International Monetary Fund (IMF) has projected an eight per cent GDP (gross domestic product) growth for the Indian economy in the medium term.

However, for this to happen, the IMF has noted that India would have to put in place policies to expedite improvements in labour market conditions and in the financial sector for sustaining efficiency in investments.

In a working paper titled ‘Wild or tamed?: India’s potential growth,’ the IMF said: “The recent shift to a more investment-led growth pattern, along with strong productivity gains, seem to have raised India’s medium-term potential growth to around 8 per cent.” However, while referring to downside risks, the paper noted that the pace of investment could decline as well “to the extent it is underpinned by cyclical forces.”

Also, basing its projections on the experiences of Asia’s fast-growing economies, the IMF paper pointed out that India’s growth story could be adversely impacted as the productivity gains that are pushing up the country’s growth could turn volatile. In fact, to deal with the problems of volatility in productivity gains, the country would require continued improvement in economic policies, it said.

In the medium term, India’s investment efficiency is pegged at a high 35 per cent of the GDP, a level comparable to the Asian economies just before the crisis.

However, to maintain this high investment rate, the country would have to meet certain challenges.

Among these, certain issues that India will have to come to terms with are large share of state-owned banks, the high statutory liquidity needs that compel banks to set aside a quarter of their deposits for government securities, a high priority sector lending requirement of 40 per cent of net lending and underdeveloped government and corporate bond markets, the IMF paper pointed out.

The paper also noted that there was no guarantee that the current pace of productivity growth would be sustained, and “It should not be implied that investment trends would not matter.”

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