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IMF lauds India's economic growth

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February 11, 2008 17:29 IST

Praising India for its macroeconomic policy and structural reforms, the International Monetary Fund on Monday said the country will grow at more than 8 per cent (this year), which was "wonderful" considering there was forecast of a global growth slowdown.

"India's economic growth is due to good policy of the government and Reserve Bank. Country is benefiting from sound macroeconomic policy and structural reforms of the last 5-10 years," IMF Managing Director Dominique Strauss-Kahn said delivering a lecture at the Reserve Bank in Mumbai.

Kahn said that effects of global financial crisis were serious and IMF has reduced the forecast for global growth to 4.1 per cent from 4.9 per cent. He, however, said that emerging market economies like India and China cannot remain immune from global crisis, which has complex linkages.

"Decoupling is a misleading idea...the linkages between developed and emerging market economies are now much more complex than before," he said.

Earlier, advanced and emerging countries only had trade links, but today they have financial links. As the financial markets face turmoil, it will reduce domestic demand in advanced economies and create more spillovers into emerging markets.

"There are large capital flows because of the wide interest rate differential, which pose policy challenges in managing liquidity," Kahn said, adding that there were signs of emerging markets being affected by financial turmoil.

Kahn said that for emerging market economies (EMEs) the need to act is not urgent, but they should be prepared to respond through monetary and fiscal policy stimulus.

"Emerging market economies have to learn from the risk management and regulatory failure from advanced economies," he said. He pointed out that EMEs like India should use the opportunity to review if some part or some instrument is not as transparent as it should have been.

Highlighting that a global solution should be offered to a global problem, the IMF Managing Director said there should be coordinated response from central bankers to the crisis. "The countries should be prepared to offer a timely, temporary and targeted fiscal stimulus," he said.

He also said there should be convergence in tools of the regulators to attain the common goal of stable global conditions. "There should be multilateral discussions and dialogues between the players," he said, adding that IMF could be a platform being a multilateral agency. He said that the financial crisis, though originated in the US, was a result of multiple factors including long period of low interest rates, weakening of financial institutions, supervisory standards and excessive risk taking.

The downside risk is emanating from worsening of the US housing crisis, deterioration in other credit markets and possible counterparty failure in credit default swap market. "US slowdown will be significant and will last for some time," he said. 

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