Inflationary Fears in India

Indian Economy faces the risk of overheating: IMF
Gaurav Choudhury
February 16, 2007

India’s robust economic growth in recent years has not gone unnoticed by the IMF. The IMF recently cautioned India’s central bankers of the possibility of India’s economy overheating. The IMF identified two problem areas – inflation and financial stability. The IMF’s warnings are especially pertinent given that inflation in India recently jumped to its highest level, 6.73, in more than 2 years.

The IMF said that in such an inflationary climate, there is a need to promote “job-intensive, inclusive growth, through further structural reforms, to create an environment in which growth more fully benefits the least advantaged.” The IMF also stated that India’s macroeconomic outlook was positive with GDP growth expected in excess of 8% for 2006-2007. Other domestic indicators were also performing soundly. According to the IMF, achieving financial sustainability while continuing to fund the development related sectors was the primary challenge facing the Indian economy. One way would be through reduction of public debt and cutting of unnecessary subsidies and fund priority needs.

Question
1. What can some of developing countries with high growth rates do to dampen inflationary fears?
2. What role can multilateral institutions play in assisting developing countries manage their inflation levels?