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India's government must plan an "appropriate" exit from its economic stimulus programme, a top IMF official said Friday, as economic recovery for Asia's third-largest gathered pace.
The comments by John Lipsky, the International Monetary Fund's first managing director, came as official data showed that India's industrial output in December climbed at its strongest pace in nearly 20 years.
"There is no simple, fit-all solution. India will have to think of an appropriate path of exit... it will be a challenge," Lipsky told reporters in Mumbai.
India's industrial production, exports and services are rising, aided by stimulus measures introduced in late 2008 to help the country out of the global economic slowdown.
The measures currently account for some 12 percent of GDP, while the central bank has injected 120 billion dollars into the economy since October 2008 by slashing rates and taking other measures to boost business.
"I am sure the (Indian) government is thinking of an exit path over the medium-term," Lipsky said, while attending an international banking conference.
Last month the Reserve Bank of India took a key first step away from its aggressively expansionist stance, to keep a lid on resurgent inflation.
It siphoned off excess liquidity from the financial system by raising the cash-reserve ratio -- the percentage amount commercial banks must keep on deposit -- by 75 basis points to 5.75 percent.
Lipsky said India, like other emerging markets, will also have to deal with the problem of rising overseas capital flows.
"The surge (in foreign funds) is in response to the stop in flows seen in 2008 during the financial crisis," Lipsky said.
Capital controls could be advisable but the IMF saw these as "temporary measures" and only for limited situations, he said.
India's stock market has surged over 80 percent in 2009, led by record foreign fund inflows of 17.45 billion dollars.
Lipsky said India would also need to formulate moves to check the fiscal deficit, which is at a 16-year high.
The deficit had ballooned to 6.2 percent in the year to March 2009 -- more than double the government's target of 2.5 percent -- rising on loan waivers for poor farmers, subsidies and stimulus packages to boost the economy.
India's government this month forecast the economy to grow by 7.2 percent in the current fiscal year.
