'Economy to grow by over 7.5%'

A report by the IMF has noted that India is continuing to reap the rewards of reforms, reports S Rajagopalan.
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Updated on Feb 22, 2006 09:20 AM IST
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None | ByS Rajagopalan, Washington

In a gung ho projection for the Indian economy, the International Monetary Fund has forecast a growth of over 7.5 per cent this year.

A report by the IMF’s Executive Board, released on Tuesday, noted that the Indian economy is “continuing to reap the rewards of more than 15 years of reforms”, but stressed that macroeconomic policies should remain vigilant with further efforts on deficit reduction.

“Notwithstanding high oil prices and a weak monsoon, the economy showed a remarkable resilience in 2004-05, with growth remaining robust and becoming broader-based,” the report said, adding: “These trends have continued in 2005-06, and growth of more than 7.5 per cent for the full year is expected.”

Fund mantra for progress

•Recommends a gradual move towards ‘full pass-through of oil prices’ with targeted support for the poor

•Without further enhancing tax revenues and reducing lower-priority spending, it will be difficult to create fiscal space for planned large and crucial increases in infrastructure and social spending

•Acceleration of tax reform critical to achieve deficit reduction targets

•Steps needed to further broaden the tax base

•Can trim existing exemptions and introduce goods

Stressing a further push on economic reforms, the report said: “With an acceleration of the reform process, India would be able to achieve sustained economic growth of 8-10 per cent, in line with the objectives of the authorities.”

The executive directors felt that the current favourable economic conditions provide a good opportunity to speed structural reforms. They made a particular mention of measures to improve the business climate and reform labour laws, saying these would help foster both private and foreign investment and job creation.

While commending the progress made in bringing down tariff levels, they noted that faster convergence to Asean levels would be desirable. “Broad-based tariff reductions would also help minimise the trade diversion potentially associated with preferential trade arrangements.”

The directors supported the government’s broad economic thrust in addressing infrastructure bottlenecks, alleviating rural poverty and deepening global integration.

While commending the inflation management thus far, the report pointed to the “upside risks” owing to underlying pressures.

With domestic demand remaining strong, the directors recommended that the fiscal policy should counter demand pressures. They highlighted the need to meet the minimum adjustment required under the Fiscal Responsibility and Budget Management Act.

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