The Fund said that with India’s long-term prospects remaining strong and private sector balance sheets sound, it expects growth to be back on track in 2010-11 even if advanced economies grow below trend

The International Monetary Fund (IMF) said that it expects India to grow at 8% in FY11 from 6.75% in FY10 with expected momentum in non-agricultural gross domestic product (GDP).

In a note, under Article IV of the IMF's Articles of Agreement, the Fund said that with India’s long-term prospects remaining strong and private sector balance sheets sound, it expects growth to be back at potential in 2010-11 even if advanced economies grow below trend.

Private consumption would benefit from better employment prospects and less uncertainty, investment would be boosted by robust corporate profits, rising business confidence, and favourable financing conditions, the IMF said.

The Fund said that it sees India's merchandise exports increasing by 22.1% to $178 billion in FY11 from $145.80 billion estimated in FY10 and imports rising 20% to $310.80 billion in the next fiscal year.

India's near-term risks are broadly balanced, the Fund said, adding that an acceleration of reforms and capital inflows could spur investment in the country. However, there are key risks like elevated inflation and financing constraints arising from—among other things—the fiscal deficit, which could put breaks on the recovery, the IMF said.

Terming India's growth prospects in the medium-term as 'bright', the Fund said that the country was not at the centre of the global crisis and its growth is well-balanced and mainly reliant on domestic drivers. There could be some risks such as difficulties in implementing productivity-enhancing reforms and continued supply bottlenecks to this favourable outlook, the Fund warned.

Given long transmission lags and the low policy rates, most directors of the IMF advised a timely start of the withdrawal of monetary stimulus that would help anchor inflation expectations and soften the impact on long-term interest rates.

The IMF said that most of its directors considered that rupee appreciation would help contain inflation and manage capital inflows, although a few directors argued for caution in this area. Sterilised intervention could help reduce excessive exchange-rate volatility, provided it does not generate further inflows, the Fund said.

The directors of the IMF also stressed the importance of developing a vibrant corporate bond market and reforms that would foster greater participation by pension funds and the insurance sector in funding infrastructure.