The International Monetary Fund (IMF) has cautioned Indian authorities to “closely monitor” the deteriorating corporate financial position and weakening bank balance sheets of banks, especially public sector banks.

There is need to strengthen prudential regulations of banks’ asset quality classification and concentration risks, the Fund said in its wrap-up of the 2014 Article IV consultations with India.

Indian authorities need to pay due regard to the inter-linkages between corporate vulnerabilities and banking system health.

Steps are also needed to modernise the legal and insolvency framework, the IMF said.

Monetary policy

Given the entrenched double digit inflation expectations, the IMF has suggested the Reserve Bank of India maintain the monetary policy “appropriately tight”.

The central bank must stand ready to raise the policy rate further to bring down inflation to more sustainable levels, the IMF said.

Introduce GST

While commending the Government’s commitment to fiscal consolidation, the IMF has emphasised the need for a comprehensive package of measures, comprising both tax and subsidy reforms, to ensure the quality and sustainability of consolidation.

Rationalising fuel and fertiliser subsidies and introducing the goods and services tax are essential to create fiscal space, while safeguarding priority capital spending and targeted social programs, particularly health and education, the IMF said.

Reviving growth

IMF also stressed that reviving growth and raising long-term growth potential require broader structural reforms to improve infrastructure, business climate and pricing and allocation of natural resources.

Key priorities should be reforms aimed at boosting agricultural productivity and supporting formal job creation, by relaxing labour laws and addressing skill mismatches.

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