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India's fast-growing economy was likely expand by 8.3 per cent this year instead of 7.3 per cent as previously projected, the International Monetary Fund said on Thursday.
Interest rates might have to be raised further to check inflation, the IMF said in its twice-yearly World Economic Outlook, predicting that India and China would be the twin engines driving the roaring economies of emerging Asia.
In 2007, India's growth is forecast to slow down to 7.3 per cent, still higher than the 7.0 per cent projected by the IMF in April, after growth of 8.5 per cent in 2005. "On the upside, there is the possibility of even faster-than-projected growth in China ... And in India," the IMF said.
At the same time, higher inflation due to rising oil prices could pose a risk for India and the country's monetary authorities might need to raise interest rates further to check an increase in consumer prices. The funding body's report said there were signs of inflationary pressures edging up in some countries as sustained high growth absorbed spare capacity.
"In India, inflation has picked up with rising oil prices and strong domestic demand," the IMF said, projecting inflation at 5.6 per cent this year and 5.3 per cent in 2007.
Inflation, based on the wholesale price index in the week ended August 26, rose to 5.01 per cent from 4.91 per cent a week earlier. The RBI has set an inflation target of 5.0-5.5 per cent for 2006-07. It is scheduled to announce a review of the 2006-07 annual policy on October 31.
"While the RBI has raised interest rates in recent months, further tightening may be needed to resist inflationary pressures," the IMF said.
The RBI increased the reverse repo rate (at which it lends overnight money to banks) by 50 basis points in two tranches in 2006-07 to curb inflation.
The IMF said countries like India, Pakistan and the Philippines, with high public debts or budget deficits should put their fiscal positions on a sustainable footing for the medium-term.
With pressure on the government to spend more, the IMF urged India to take measures to broaden its tax base and reduce state subsidies.
"In India, strong spending pressures have emerged, limiting fiscal adjustment in financial year 2006/07," the IMF said.
"With the general government deficit and debt still high, further consolidation is clearly warranted at both the central and state government levels, including through measures aimed at broadening the tax base and reducing subsidies."
