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IMF: India to Become World’s Fastest Growing Economy

Managing Director of the International Monetary Fund Christine Lagarde, right, speaks as Governor of Reserve Bank of India (RBI) Raghuram Rajan looks on during an event at the RBI headquarters in Mumbai, India, March 17, 2015.

International Monetary Fund chief Christine Lagarde said India is poised to become the world’s fastest growing major economy overtaking China as early as this year. During a recent visit to India, she also cautioned emerging markets to brace for instability in the event of a hike in interest rates by the United States.

Sounding a bullish note about the Indian economy, International Monetary Fund chief Christine Lagarde said that while most countries are battling slow growth, India is marching in the opposite direction. She called it “a bright spot” in a gloomy global economy.

That upbeat assessment came during Lagarde’s two-day stop earlier this week in India, where she met Prime Minister Narendra Modi, addressed college students and gave a speech at the Central Bank.

“The recent policy of reforms, improved business confidence has provided a booster shot to economic activity. Using India’s new GDP series, the IMF expects growth in India this year in the range of at 7.2, and we see that at 7.5 per cent next year, making India one of the fastest growing economies in the world,” Lagarde explained. “Of all the large economies, India is the fastest. And indeed a brighter future is being forged. By 2019, the economy will have more than doubled in size compared to 2009. And when adjusting for differences in purchase prices between economies, India’s GDP will exceed that of Japan and Germany combined.”

Need for further reforms

However the IMF chief sounded a warning note, saying that reforms need to be pushed with the utmost speed. Among them are implementing a uniform goods and services tax, passing more flexible labor laws and easing bureaucratic hurdles that often stall projects.

Economists in India echo her sentiments.

Chief economist D.K. Joshi at CRISIL ratings agency in Mumbai said recent policy initiatives by the government have boosted the economy, but more needs to be done.

“My sense is that even some of the ease of doing business measures which the government is taking, those things will help India sustain the growth rates,” Joshi said. “But unless you get the other reforms in place, the growth may not last very long, or you may not be able to transit to 9-10 per cent growth which is desirable.”

However the road ahead is not easy. For example, the government is facing stiff political opposition in efforts to pass a key bill that would ease the process for acquisition of land needed for infrastructure, mining and other industrial projects.

US interest rates

While in India, Lagarde also cautioned emerging markets to be prepared for a possible rise in U.S. interest rates. She said this could trigger volatility in financial markets, giving rise to potential stability risks of the kind witnessed in 2013.

At that time, countries like India were badly hit following a signal by the U.S. Central Bank of a reduction in its multibillion dollar asset purchase program.

Developing economies have seen a surge in capital from industrialized countries in recent years, but they remain nervous that a hike in interest rates in the U.S. could prompt another sudden flight of capital.

However, economist Joshi said India is in a better position than many other emerging economies to withstand such a potential jolt. “If and when the Fed raises interest rates, we will also see money move out of the country and that will have an impact on our exchange rates, but once the dust settles, given that India has good macros right now, the money will flow back in. So our belief is that it will be temporary or transient,” Joshi stated.

The U.S. central bank signaled on Wednesday that a rate hike could come later this year, but only if economic data indicators are right.