High oil prices behind inflation in India, monetary tightening needed: IMF

The surge in oil prices due to the Ukrainian war has pushed up inflation in India, which needs monetary tightening and measures to address structural weaknesses to improve growth potential, said a senior IMF official.

According to estimates, the country’s economy is likely to grow at 8.2 per cent in 2022-23, down 0.8 per percentage points, said Anne-Marie Gulde-Wolf, Acting Director of the IMF’s Asia and Pacific Department.

"So while still strong, it is a significant downgrade. We really see the difficult policy trade off for policymakers supporting the worldwide controlling of inflation, which has already started going up," she told reporters at a news conference here.

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"The reason why inflation has gone up is really the spillovers from the war in Ukraine, where India is particularly dependent on oil and commodity imports," she said.

In the short run, we think a commodity fiscal stance is appropriate, supporting vulnerable households and putting focus on infrastructure investment, the IMF official said responding to a question.

She recommended monetary tightening and measures to check structural weaknesses.

"Well-communicated monetary policy actions are needed but probably some monetary tightening," she added.

"To enhance India's growth potential, it is important to address structural weaknesses of the Indian economy that provide bottlenecks to achieve longer-lasting growth. These bottlenecks are in the labour market, land market, better educational outcomes, and very much also getting higher share of females into the labour force," said the IMF official.

"So, in sum, the potential is definitely there but it will require policy actions," she said.

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