Indian growth may weaken to a decade-low this year after investment stalled, the International Monetary Fund said, as it called for interest rates to remain unchanged until the nation’s high inflation rate eases.
Gross domestic product will rise 4.9 percent in 2012, the Washington-based lender said in its World Economic Outlook report today, less than a July forecast of 6.1 percent. The expansion will accelerate to 6 percent next year, it said, helped by improving overseas markets and a boost to confidence from a recent government policy revamp.
“The outlook for India is unusually uncertain,” the IMF said. “Monetary policy should stay on hold until a sustained decrease in inflation materializes.”
India’s government began the policy overhaul last month to boost the economy and avert a credit-rating downgrade, snapping months of political gridlock. The steps to curb expenditure on subsidies, contain a fiscal deficit and permit more investment from abroad triggered a surge in the rupee and buoyed stocks.
“There is an urgent need to reaccelerate infrastructure investment, especially in the energy sector, and to launch a new set of structural reforms, with a view to boosting business investment and removing supply bottlenecks,” the IMF said. “Structural reform also includes tax and spending reforms, in particular, reducing or eliminating subsidies, while protecting the poor.”
The government’s recent policy changes are “very welcome,” the fund also said. Its forecast for economic growth in 2013 compares with an estimate of 6.5 percent in July.
Indian inflation probably accelerated to 7.68 percent in September, according to a Bloomberg News survey before a report due Oct. 15. The Reserve Bank of India has left interest rates unchanged since a cut to 8 percent from 8.5 percent in April, the first reduction since 2009.
India’s overall fiscal deficit may widen to 9.5 percent of gross domestic product in 2012, compared with a projection of 8.3 percent in April, according the IMF’s figures. The shortfall will be 9.1 percent next year, higher than April’s estimate of 8.2 percent. The gap was 9 percent in 2011, the IMF said.
The government’s policy changes began with a 14 percent increase in diesel prices announced on Sept. 13 to restrain expenditure on compensation for below-cost sales. The administration also said it will pare the supply of subsidized cooking gas.
While such steps are “significant,” underperforming tax revenues and demand for more social spending because of a below-average monsoon season are among obstacles to narrowing the fiscal shortfall, according to the fund.
“Achieving the downward deficit path laid out in the 2012/13 medium-term budget will require further measures, including sustainable subsidy reform,” it said.
India’s rupee has strengthened about 6 percent against the dollar since the nation started the policy revamp, paring its decline in the past year. The currency climbed 0.7 percent to 52.2675 per dollar as of 9:30 a.m. in Mumbai, while the BSE India Sensitive Index of stocks advanced 0.8 percent.