The Hindu Business Line : IMF bouquets and brickbats

NO LONGER is India the kind of IMF borrower it was in the early 1990s, when it had to agree to a structural adjustment programme to tide over the worst-ever balance of payments crisis the country faced, and no longer do the two perceive each other as they did a decade ago.

Especially at the International Monetary Fund which, buffeted by the strident criticism of Washington Consensus approach that has led to a perpetuation of imbalances within nations adopting the conditions that come with Bretton Woods loans, has moderated its stringent conditionalities.

As a founder member of the IMF, in the late 1940s and as part of Article IV of the Fund's Articles of Agreement, India holds bilateral discussion with the multi-lateral institution every year. In this regard, a staff team visited India to glean economic and financial information and discussed with officials the country's economic development and policies.

A brief was subsequently prepared on the visit and on January 24, 2004, the Executive Board concluded the Article IV consultation with India and the IMF Managing Director, as Chairman of the Board, summarised the views of the Executive Directors.

In a background, the IMF officials praised India for being on track for another year of robust growth, bolstered by industry embarking on a new investment cycle that is reflected in strong credit growth. As the basic remit of the Fund is to address balance of payments problems of members, the IMF team found India's BoP position comfortable notwithstanding the higher oil prices.

While export growth continues to be strong, high oil prices and strong investment demand have widened the trade deficit (2.6 per cent of GDP till end-December this fiscal). But continued gains in services and strong remittances should keep the current account broadly in balance in 2004-05.

The Fund thought the capital account developments were driven by a renewed optimism over the Indian economy, following a post-election lull. Rising portfolio inflows are accompanying a pick-up in foreign direct investment. Foreign exchange reserves remain comfortable, at $129 billion in mid-January. While hailing the new Government's ambitious reform agenda — especially the renewed emphasis on creating jobs and reducing rural poverty and its commitment to addressing fiscal imbalances — the Fund emphasised that rapid progress on a broad range of reforms would be required to build on recent successes and for India to achieve its full potential.

While not glossing over the large fiscal deficit and the public debt, the key constraints to sustained rapid growth, the Fund cautioned that with credit to the private sector on the rise, the Government's large financing needs could increasingly crowd out private investment. The Fund said unambiguously that fiscal consolidation is a prerequisite for a holistic financial sector development and further opening up of the external sector. The IMF also emphasised that without enhancing tax revenues and reducing lower-priority spending, it will be difficult to address adequately India's enormous infrastructure needs.

In appreciating New Delhi's emphasis on closing the infrastructure gaps, the Fund struck a note of caution on the proposal to use foreign exchange reserves to finance infrastructure spending, a pet idea of the Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia. Being a votary of fiscal prudence and stickler for price moderation to cushion the ill-effects of inflation, the Fund is not only critical of Dr Ahluwalia's idea but also sceptical of the fallout. It thinks that using forex reserves in this manner can compromise perceptions of central bank independence and stoke inflation. In recommending the importance of keeping any increase in infrastructure spending within the limits of the Fiscal Responsibility and Budget Management Act (FRBMA), the Fund said significant private sector participation in infrastructure would be "forthcoming if India will step up its efforts to improve the investment climate and enhance the regulatory framework for public-private partnerships".

On the financial sector reforms, the Fund lauded the continued progress made in beefing up the financial sector but cautioned that the recent spurt in private sector lending — while generally welcome — demands close scrutiny by the Reserve Bank of India. It is also germane to note that the Fund did not refrain from drawing the attention of the authorities "to the large bank holdings of government securities as a significant potential risk in a rising interest rate environment" and suggested close monitoring of the risk management practices of banks. This needs to be seen in the light of the recent hike in the EPF interest rate to 9.5 per cent by the Government under political compulsion that all but sent a wrong signal for a hardening interest regime ahead.

On the energy front, the Fund appreciated the Centre's burden-sharing approach to bearing the costs of sharp increases in international oil prices but cautioned that this may not be sustainable. With oil prices likely to remain high and volatile for sometime, it is important for the authorities to allow their automatic pricing mechanism (import parity) to work, it said adding that this would protect government revenues, limit losses of state-owned petroleum companies and lead to more efficient energy use.

Of course, the Fund's diagnosis and prescriptions are not binding and it is up to the authorities to act as they see best. But if in this era of coalition governance, opportunistic politics coupled and populism lead to bad economics, it is bad news for the country.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The looming crisis on Iran

Good job, but not enough

Corporate duty

IMF bouquets and brickbats

Building urban infrastructure

Gas pipelines