IMF suggests reforms, inflation check to resume India's high growth
The International Monetary Fund has suggested reinvigoration of structural reforms, including development of infrastructure, fiscal consolidation and controlling of inflation to bring India's growth back to potential and ensure its inclusiveness.business Updated: Apr 18, 2012 11:49 IST
The International Monetary Fund (IMF) has suggested reinvigoration of structural reforms, including development of infrastructure, fiscal consolidation and controlling of inflation to bring India's growth back to potential and ensure its inclusiveness.
In the assessment of IMF Executive Board, which concluded 2012 Article IV Consultation with India last month, sound macroeconomic policies and fundamentals enabled India to weather well the global economic crisis. Nevertheless, economic growth has slowed below trend in the last year due to cyclical and structural factors, and while inflation has come down, it is still high.
Some directors noted that it is difficult to attribute the current slowdown to structural factors. Downside risks prevail in light of the uncertain global environment, supply constraints and elevated funding costs.
A major challenge will be to bring growth back to potential and ensure its inclusiveness, while further lowering inflation, IMF said, noting the directors underscored that this will require a reinvigoration of structural reforms and fiscal consolidation.
Directors encouraged continued vigilance against inflation, IMF said. "They agreed that policy rates should be kept unchanged until inflation is clearly on a downward trend, given the uncertain outlook for growth."
They encouraged the Reserve Bank of India to stand ready to raise policy rates if inflation starts to rise again, while it could consider cutting rates if the inflation momentum clearly eases.
Stressing that fiscal consolidation is crucial to crowd in private investment and lower inflationary expectations, the IMF directors supported the planned reorientation of expenditure toward infrastructure and the social sectors, and highlighted the need to rationalise fuel and fertiliser subsidies and improve public expenditure management.
They encouraged tax reform, especially the introduction of the goods and services tax.
Directors considered the flexible exchange rate regime to be an important buffer against external shocks, and supported the policy of intervening in the foreign exchange market only to contain volatility and to prevent disruptive movements.
They welcomed the authorities' moves toward further trade and gradual capital account liberalisation.
IMF directors also underscored the importance of structural reform to raise public and private investment and boost inclusive growth.
Continuing to develop infrastructure, which in turn requires facilitating land acquisition and mining, would ensure that India's growth potential remains intact, they said.