New Delhi: India’s near-term growth outlook has brightened and the balance of risks have become more favourable, helped by greater political certainty, policy action and a conducive economic environment, the International Monetary Fund (IMF) said in a report released on Wednesday, calling for deeper structural reforms.
IMF’s growth projections for the economy, however, are lower than the government’s. In the report, the fund forecast that the economy will grow 7.2% in the year that ends on 31 March, using the new method of calculating gross domestic product (GDP). The government has estimated 7.4% growth.
In 2015-16, IMF projects India to grow 7.5%; the finance ministry has estimated the growth rate at a faster 8.1-8.5%.
“The revised growth figures support our view that economic recovery in India is under way, albeit pointing to a somewhat faster pace than we, and others, previously believed,” said Paul Cashin, IMF mission chief for India.
The IMF’s conclusions and recommendations, including one that the central bank should keep monetary policy tight for a durable slowing of inflation, are contained in its annual staff report on so-called Article IV consultations with India. The fund holds these bilateral discussions with member countries regularly.
Recent GDP revisions by the Central Statistics Office have puzzled policymakers and economists, many of whom have openly questioned the numbers. Under the new method of calculating GDP, India’s growth was revised to 6.9% in the last fiscal year, which critics said was out of synic with other related data such as industrial production growth.
“These GDP revisions portray a more resilient performance of the services and manufacturing sectors of the economy.” Cashin said.
The IMF will continue to examine the new method of measuring GDP and its implications for its growth forecasts, the fund said. Further details on the compilation method will enable a deeper understanding of India’s near-term and medium-term growth, it added.
IMF said raising India’s potential growth rate and ensuring it begins to generate sufficient jobs requires deeper structural reforms.
It listed six such reform measures: addressing bottlenecks in energy, mining and power; increasing investments to help close infrastructure gaps; taking steps to simplify and speed up the process of acquiring land and obtaining environmental clearances; reforming the agriculture sector to ensure greater efficiencies in the public system for food procurement, distribution, and storage; making labour markets more flexible, to encourage young job-seekers and boost currently low female labour force participation; and improving education to meet rising shortages of skilled labor.
“Moving the economy forward in these directions will help India continue along the path toward a brighter economic picture of rapid economic growth and macroeconomic stability for many years to come,” Cashin said.
But while public and private consumption look stronger, Cashin added, investments continue to be held back by structural and supply-side constraints.
Within the next 15 years, India will have the largest and one of the youngest workforces in the world, and will need to create jobs for the roughly 100 million young Indians who will enter the job market in the coming decade.
The fund advised the Reserve Bank of India (RBI) to keep monetary policy tight in order to reduce inflation and inflation expectations durably.
“Despite recent moderation in headline inflation, underlying inflationary pressures and upside risks remain,” it said.
IMF directors noted that significant external and domestic risks remain while the room for countercyclical macroeconomic policy support is limited by a still-high fiscal deficit and upside risks to inflation.
RBI cut its key repurchase rates by 25 basis points to 7.5% on 4 March, following a similar cut on 15 January, after the government put out a new fiscal consolidation roadmap in its budget presented on 28 February.
RBI cited easing inflation and the quality of fiscal consolidation for the second cut in the repurchase rate, at which it lends funds to commercial banks.
IMF said retail inflation is projected to move up to about 6.25% by March 2015 and hover slightly above 6% over the course of 2015-16, as growth picks up, slack dissipates, and a favorable base effect kicks in.
The current account deficit (CAD) is expected to remain contained at around 1.75% of GDP in 2015-16, helped by significantly lower oil import prices, shrinking gold imports, and rebounding exports.
India’s CAD narrowed to 1.6% of GDP in the quarter ended 31 December, compared with 2% of GDP in the previous quarter, as net services exports rose and capital outflows fell. The Economic Survey has projected CAD at 1.3% of GDP in 2014-15 and less than 1% of GDP in 2015-16, assuming a further moderation in the average annual price of crude petroleum and other products.
IMF, however, cautioned that despite the reduction in India’s external imbalances and strengthening of buffers, the spillover impact of global financial market volatility to India could be very disruptive.
That includes any unexpected developments in the course of US monetary policy normalization, particularly against the backdrop of recent large capital inflows.
“External risks also emanate from a prolonged period of weak global growth, which could dampen Indian exports. Domestic risks include a supply-driven spike in inflation, further deterioration in bank asset quality and continued stress in corporate financial positions, as well as slower-than-expected progress in addressing supply-side bottlenecks, which could weigh on growth and stoke inflation,” the report said.
“On the upside, expedited structural reforms and faster implementation of cleared investment projects could lead to stronger growth, as would sustained low global energy prices,” it added.
The IMF directors were of the view that the main external risk facing India is a surge in global financial market volatility.
“They agreed that, should external pressures re-emerge, rupee flexibility should continue to be an important shock absorber, complemented by judicious foreign exchange intervention, tightening of monetary conditions, and additional fiscal adjustment,” the IMF report added.
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