Reuters

Washington, Mar 18: India's economy is slowing dramatically and uncertainty surrounding the outlook is unusually large, the International Monetary Fund Financial crisis said.

The IMF forecast that India's gross domestic product growth would slow to 6.3% in the 2008-2009 fiscal year, ending in March, and to 5.3% the following year. That would be well below the 9% growth rate in the 2007-2008 year.

"Policy measures to stimulate the economy and a good harvest should support domestic demand," the IMF said.

"The uncertainty surrounding the forecast is unusually large, with significant downside risks. The main upside risk stems from a larger-than-anticipated impact of the stimulus measures that the authorities have already implemented."

The Fund cautioned that India's debt as a percentage of GDP was already high, so a big expansion of the deficit could raise concerns about fiscal sustainability. Any additional stimulus should be focused on "high-quality infrastructure and poverty-related spending" or to recapitalize banks if needed.

The IMF said given the budget constraints, monetary and structural policies would have to do the heavy lifting. But directors were split on whether there was scope for more interest rate reductions or if a wait-and-see approach was preferable.

They supported India's flexible exchange rate policy, and said currency market intervention "should be consistent with the goal of ensuring sufficient domestic liquidity."

IMF staff concluded that India's exchange rate appeared to be close to its equilibrium level.