Dubai: The International Monetary Fund (IMF) underscored the importance of structural reforms in India to raise public and private investment and boost inclusive growth.
"While some progress has been made, many [IMF] Directors were of the view that a more determined effort to remove structural impediments is required in several areas. On the other hand, some directors felt that structural reforms were progressing at a measured pace. Continuing to develop infrastructure, which in turn requires facilitating land acquisition and mining, would ensure that India's growth potential remains intact," IMF said in its annual report on Indian economy released on Wednesday.
"Financial sector development and reform are needed to improve access to credit and diversify funding sources. Addressing skill mismatches, increasing labour market flexibility, and improving agricultural productivity are crucial to support formal job creation and reduce poverty," it said.
India's growth remains one of the highest in the world, but a range of factors have weighed it down. Following a rapid recovery after the global financial crisis, the economy has slowed more than most other major emerging markets, as investment has been dampened by a confluence of cyclical and global factors, as well as by concerns about structural impediments.
Growth is projected at about seven percent for 2011/12 and 2012/13, with inflation forecast to remain above the RBI's comfort zone. Investment is anticipated to pick up modestly from the slump recorded in late 2011, and consumption should remain robust, but exports are expected to cool. Inflation is projected to fall in the near term, but to stay above the Reserve Bank of India's objective. The current account is projected at 2.8 per cent of GDP.
"Growth risks are to the downside. The main domestic risk is a further weakening of private investment if government approvals do not accelerate, reform efforts are not reinvigorated, and inflation remains high and volatile. At the same time, external risks continue to be elevated as Euro area growth could underperform and bank deleveraging could intensify even in the absence of a new full-fledged global financial crisis. Inflation risks remain, as momentum indicators are mixed," it said.
IMF stressed that fiscal consolidation is crucial to crowd in private investment and lower inflationary expectations.
They supported the planned reorientation of expenditure toward infrastructure and the social sectors, and highlighted the need to rationalise fuel and fertiliser subsidies and improve public expenditure management. They encouraged tax reform, especially the introduction of the goods and services tax.
Directors considered the flexible exchange rate regime to be an important buffer against external shocks, and supported the policy of intervening in the foreign exchange market only to contain volatility and to prevent disruptive movements. They welcomed the authorities' moves toward further trade and gradual capital account liberalisation.
