Commending India's strong economic performance in recent years, the International Monetary Fund (IMF) has said "India confronts the current global economic and financial crisis from a position of strength."
India's strong economic performance in recent years "reflected sound macroeconomic policies and continued progress with structural reform, the IMF Executive Directors said in their assessment after their annual Article IV Consultation with New Delhi.
Observing that there have been spillovers from the global crisis, they commended Indian authorities' "swift and comprehensive policy response, but underscored the downside risks and called for maintenance of a flexible, pragmatic, and proactive policy stance."
According to a summary of the IMF report released on Tuesday, directors agreed that a key short-run policy objective should be to sustain liquidity and credit flows.
"They believed that monetary and structural policies will have to continue to carry most of the burden of adjustment, given the high public debt-GDP ratio."
Directors welcomed the central bank's actions to ease monetary policy and stimulate bank lending.
A number of directors saw scope for further monetary easing, in light of the projected decline in inflationary pressures and the need to reinforce confidence and sustain bank credit.
However, a number of other directors saw merit in the authorities' wait-and-see approach, given the highly uncertain economic environment, it said.
IMF supported the authorities' flexible exchange rate policy, which will help the economy to adjust to the global downturn, while commending "the strength and resilience of India's financial system, reflected in favourable financial soundness indicators."
The directors however, "stressed that rising credit risk and liquidity pressures could put the financial system under strain, while negative feedback loops between the real and financial sectors could turn out to be strong."
They therefore encouraged the authorities to take additional preventive action, including identification of potential bank re-capitalisation needs and measures to promote early loss recognition, full disclosure of bad assets, and filling of information gaps, the report said.
They underscored the importance of persevering with reforms to deepen and further strengthen the financial sector, develop the corporate bond market, and improve banking efficiency.
IMF Directors broadly supported the authorities' gradual and cautious approach to capital account liberalisation. They encouraged further progress, observing that liberalisation could help to ease external financing constraints. Directors also welcomed the authorities' commitment to trade liberalisation.
Directors acknowledged that the sizeable fiscal stimulus undertaken in 2008-09 should help to support economic growth. However, they stressed that, given the high ratio of public debt to GDP, significant further expansion of the deficit could raise concerns about fiscal sustainability.
They encouraged the authorities to use the limited available fiscal space only for high-quality infrastructure and poverty-related spending, and for bank recapitalisation if needed.
Directors stressed that medium-term fiscal consolidation remains a priority, and should continue to be anchored in a fiscal rules framework to be backed by comprehensive expenditure reforms and measures to broaden the tax base, the IMF said.