The International Monetary Fund says demand pressures are pushing up inflation in India. "A pick-up in core inflation and inflation expectations suggests that demand pressures are already playing a role in pushing up inflation in India," IMF's Regional Outlook for Asia and Pacific released on Thursday said. (See: Inflation rate edges up to 1.51 per cent)
On the positive side, it says that there are ''upside risks'' to growth projections for both this year and the next, as signs of recovery are broadening and the adverse impact of the monsoon is likely to be smaller than anticipated.
The report points out that India's ''growth is expected to accelerate to 6.5 per cent in 2010 from 5 per cent in 2009, on the back of strong domestic demand. In particular, the normalisation of financial market conditions is expected to support a rebound of private investment, sustaining demand even as the fiscal stimulus wanes''.
Private demand is expected to bounce back very strongly in 2010 and the growth rate of private domestic demand is projected to be as high as 8.14 per cent, far higher than the average for 2004-08.
The IMF said in some sectors recovery is advancing so rapidly that output gaps are reducing and inflationary pressures are emerging. "In India industrial production is recovering rapidly, and core inflation and inflation expectations are rising," it said. India's industrial growth has recovered to a 22-month high of 10.4 per cent in August compared with 1.7 per cent a year ago.
IMF had earlier this month projected the Indian economy to grow 5.4 per cent in 2009 and 6.4 per cent in 2010. The southwest monsoon, the lifeline of India's agriculture, was 23 per cent below normal this year, the worst in 37 years. The poor rains are likely to bring down rice output, India's main summer crop, by 10-15 million tonnes.