Hike in policy rates will pull down India’s GDP to 7.8% next year: IMF

The International Monetary Fund (IMF) today said that further increase in key policy rates and the base effect are likely to pull down India's gross domestic product (GDP) to 8.2 per cent in 2011 and further down to 7.8 per cent in 2012 from a double-digit high of 10. 4 per cent in 2010.

While growth in Asia would mainly be led by India and China , IMF's 'Regional Economic Outlook' warned against overheating of the two economies. The outlook said that inflation remains a key concern in Asia as production capacity may not be able to keep pace with aggregate demand in countries such as India and China.

"The IMF warns that Asia's rapid recovery from the global economic crisis has been accompanied by pockets of overheating across the region," the report stated.

It pointed out that tight labour markets, strong productivity growth and policy measures in India and China that boost household income will imply that wages continue to outpace inflation. This will have a negative impact of higher prices on real disposable income and consumption.

In IMF's estimate, after accounting for both the direct and indirect impact on inflation, a further 10 percent increase in global commodity prices in 2011 would lead to an additional 1 percent increase in headline inflation. "The impact would be larger in China, India, and the Asean economies, whereas it would be smaller in Japan, Australia and New Zealand," it said.

The headline inflation in India stood at around 9 per cent in end-March, which is higher than the RBI's projection of 8 per cent, and much above the comfort level of 5-6 per cent.

Even though the Reserve Bank of India has raised key policy rates eight times over the past one year, the report suggests that policy rates remain below IMF's predicted levels for India. "Real policy rates are still negative in several regional economies, including China, Korea, and India, and much lower than historical averages in Indonesia," it said.

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