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IMF says India must continue with reforms
04
Mar '16
The International Monetary Fund (IMF) has cautioned that global financial market volatility, a potential further deterioration in exports, and strains in bank and corporate balance sheets could weigh on India's growth prospects. High fiscal deficits and upside risks to inflation constrain the scope for countercyclical policies.

It also said India's potential is enormous but it needs to continue with reforms to remain in the economic 'sweet spot' while reiterating its forecast that the country's growth will pick up marginally next year.

In its annual Article IV consultation report, the IMF underscored the need for continued vigilance, growth-friendly fiscal consolidation, and sustained reforms to enhance the resilience of the economy and bolster potential growth.

IMF Executive Directors who held consultation with Indian authorities said addressing supply constraints and further improving the business environment remain important priorities. Progress in these areas would have a positive impact on poverty reduction.

The Directors stressed the importance of preserving external stability. They noted that India's international reserves are assessed to be adequate. They agreed that, in the event of a surge in global financial market volatility, exchange rate flexibility remains a key shock absorber, complemented by judicious foreign exchange intervention. They encouraged the authorities to sustain the reform momentum to further enhance investor confidence and attract foreign direct investment, while cautiously liberalizing external commercial borrowings by the private sector.

The Directors welcomed the adoption of flexible inflation targeting and progress in enhancing monetary policy transmission. Given upside risks to inflation and still high household inflation expectations, they agreed that the monetary policy stance should remain appropriately targeted at ensuring durable reduction in inflation toward the medium-term target, supported by clear policy communication, continued fiscal consolidation, and measures to boost food supply. They encouraged the monetary authorities to stand ready to tighten the stance if warranted.

The IMF Directors welcomed the recent improvements in the quality and efficiency of public expenditure, as well as revenue-enhancing measures. They called on the authorities to articulate and implement credible measures that would underpin the achievement of the medium-term fiscal deficit targets and increase fiscal space for priority capital spending and social expenditures. Crucial in this regard are further reforms of fertilizer and food subsidies, a well-designed goods and services tax, and improved tax administration.

While acknowledging that India's financial system is generally sound, the Directors noted potential risks from weak corporate and bank balance sheets. They supported ongoing efforts to further enhance bank supervision, and encouraged the authorities to continue to strengthen prudential regulation for bank asset quality recognition, augment capital buffers and improve corporate governance at public sector banks, as well as enhance the bankruptcy and insolvency framework. (SH)

Fibre2Fashion News Desk – India

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