In a thumbs-up to Finance Minister Arun Jaitley’s financial management, the International Monetary Fund has said that the Indian economy is on the path to recovery, helped by low crude oil prices, improving current account and fiscal deficits, as well as a sharp fall in inflation.
However, in its India: 2016 Article IV Consultation report, the IMF has pegged the country’s growth rate at 7.3 per cent this fiscal and 7.5 per cent for the next. This is marginally lower than Jaitley’s official estimate of 7.6 per cent GDP growth in 2015-16 and 7-7.75 per cent in 2016-17.
“The Indian economy is on a recovery path, helped by a large terms of trade gain (about 2.5 per cent of GDP), positive policy actions, and reduced external vulnerabilities,” said the report, which is based on the IMF’s consultations with officials from the Finance Ministry and the Reserve Bank of India.
With some uptick in industrial activity, the Washington-based international lender also expects a pick-up in private investment to help broaden the economic recovery.
The report has, however, warned that a number of economic risks remain. On the external front, it has highlighted a possible disruption from increased volatility in global markets, unexpected developments in US monetary policy and China’s slowdown.
On the domestic front, the IMF has listed the weakness in corporate financial positions and bad loans of banks, as well as the delay in reforms as risks that could weigh on growth, accelerate inflation and undermine sentiment.
“On the upside, further structural reforms could lead to stronger growth, as would a sustained period of low global energy prices,” it said.
The report also stressed the need for continued vigilance, growth-friendly fiscal consolidation, and sustained reforms to enhance the resilience of the economy and bolster potential growth.
Essential reformsIt said reform priorities include removing supply-side bottlenecks, especially in the agricultural and power sectors, and facilitating land acquisition. “Further reforms are also essential to boost employment in the formal sector, encourage female labour force participation, and enhance labour market flexibility more broadly,” said the IMF.
The report welcomed the adoption of flexible inflation targeting and the progress in enhancing monetary policy transmission, and said the RBI should be ready to tighten the monetary stance, if required, to control inflation.