That this scenario nearly fits in with current trends in India is borne out in RBI’s Third Quarter Survey of macro-economic developments published ahead of another round of monetary policy tightening measures announced on January 25. The survey projects a phase of robust growth co-existing with elevated inflation and says containing it becomes the dominant policy objective in the near term.

India’s chronic inflation over the last two years has been driven essentially by food prices in conditions of entrenched supply side pressures aggravated by rising demand, limiting the effectiveness of monetary policy measures thus far. Aggregate demand management measures have now become imperative, especially with the widening of the current account deficits and the likelihood of oil prices moving on a higher range. IMF has revised its base line oil price projection to 90 dollars a barrel in 2011.

Updating its World Economic Outlook of October last, IMF has projected global growth at 4.5 per cent in 2011, an increase by half a percentage point, reflecting better-than-expected activity in the second half of 2010 as well as new fiscal measures in the United States where growth is now projected at 3 per cent in 2011 though US economists expect a 3.5 to 4 per cent growth. The update has not revised growth estimates for China at, 10.3 and 9.6 Per cent for 2010 and 2011 and for India 9.7 and 8.4 in these two years.

The most urgent requirements for a robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies(USA), IMF says These need to be complemented with policies that keep overheating pressures in check and facilitate external rebalancing in key emerging economies.

Non-oil commodity prices are expected to increase by 11 percent in 2011. IMF says high food price inflation has been quite persistent, straining the budgets of low-income households and beginning to feed into overall price inflation which would remain elevated in a number of emerging economies.

IMF warns that if policy makers in emerging economies and other developing countries fall behind the curve in responding to nascent overheating pressures and asset price bubbles, these economies could be setting the stage for boom-bust dynamics in real estate and credit markets and eventual hard landing. Since emerging markets now account for almost 40 percent of global consumption and more than two-thirds of global growth, a slowdown in these economies would deal “a serious blow” to the global recovery and rebalancing that needs to take place in the global economy.

The IMF update draws attention to US fiscal deficit projected at 10.25 per cent in 2011 (more than double that in euro area) and gross government debt likely exceeding 110 percent of GDP in 2016. It calls for a credible, medium-term fiscal strategy, the lack of which could drive up US interest rates and prove disruptive for global financial markets and for the world economy. The Obama Administration is expected to spell out its approach to the fiscal challenge early and incorporate certain measures in its Budget for Fiscal 2012 to be presented in February.

IMF says policies should also be put in place to bring debt down over the medium term with measures including entitlement reforms, tax reform and caps on discretionary spending. At the same time, monetary accommodation needs to continue in advanced economies as long as inflation expectations remain anchored and unemployment stays high.

Global financial stability is still not assured, IMF says, referring in particular to the sovereign credit risks in the euro area and continued weakness in fiscal balances of some of the advanced economies. Policies are needed to tackle fiscal and banking sector vulnerabilities. IMF has suggested that the effective size of the European Financial Stability Facility should be increased and should have a more flexible mandate. The introduction of a pan-European bank resolution framework with an EU-wide fiscal backstop would help decouple sovereign and banking risks.

In the case of United States housing finance system, IMF report says overhaul is needed including the role of the two mortgage-related government-sponsored enterprises which could either be privatized or converted to public utilities with an explicit guarantee. The Obama Administration is expected to announce its proposals for the housing market in February.

Dealing with financial markets in emerging economies, IMF says although most measures of equity valuations are within historical ranges, “hot spots” appear to be emerging in the equity markets in a number of countries including Mexico and India. Non-financial private debt is approaching the maximum ratios between 1996 and 2010 (Brazil, China, India and Korea, for example).In some countries, the change may represent financial deepening and healthy market development and in other countries, it could signal an increase in risk and calls for authorities to remain vigilant. (IPA Service)