The Hindu Business Line : IMF for continuing reforms to ensure higher growth

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New Delhi Jan. 26 The International Monetary Fund (IMF) pegs India's gross domestic product (GDP) growth at 9 per cent in the current fiscal, with growth "being rapid and broad-based, driven by private consumption and investment spending".

Releasing the assessment of the 2006 Article IV Review of the Indian Economy in Washington, the Fund's Deputy Director, Asia & Pacific Department, Ms Wanda Tseng, said the IMF's discussion with India focused on four policy priorities: guarding against the risk of overheating, reducing the Budget deficit and public debt, while allowing room for social and infrastructure spending; developing financial markets; and pursuing further structural reforms. She said the strong performance thus far is "testament to sound macro-economic management and steady reforms".

Stating that the Government finances remain in the best position in over a decade, Ms Tseng, however, cautioned that the Budget deficit and debt remain still high and need to be reduced. The Fund report, however, said provision needs to be made for social and infrastructure spend, but sees scope to achieve both aims by "broadening the tax base — by eliminating corporate income-tax incentives, cutting exemptions, and continuing to work towards a national goods and services tax".

Further, the Fund contends that subsides could be better-targeted, not just to trim spending, but also to ensure that the poor get requisite support.

Financial markets

Pointing out that developing the financial markets would bolster long-term growth by promoting more efficient intermediation and risk management, the Fund said this calls for making the money and Government securities markets more liquid and allowing "a larger role for the embryonic corporate bond and derivative markets".

To broaden India's investor base and improve channels for funding longer-term investment, the limit on FDI in insurance should be raised and private participation in the pension system permitted, it said.

Ms Tseng said while one key priority is enhancing India's infrastructure to boost long-run growth potential and spur job creation, she said special economic zones are another element of the country's development strategy. "Better targeting of tax incentives for the zones could limit potential revenue losses and maximise their contribution to growth".

Business climate

The Fund also called for efforts to improve the business climate and reform education, as well as to alleviate rural poverty through promoting agricultural growth.

The Executive Board concluded 2006 Article IV Consultation with India on December 20, 2006 in Washington, after a staff team from the Fund visited India and held talks with officials here.

They said the investment recovery and consumption boom continue to widen the external current account deficit. While underscoring the need to be vigilant to guard against any potential risks of overheating, the Fund drew attention to the continuing high growth in real estate prices on the back of a credit boom.

It also emphasises the need to implement the recommendations of Government committees on subsidies, including an automatic market-based mechanism for petroleum goods and better targeting of kerosene subsidies.

While exports are going apace, robust domestic demand is likely to contribute to a further widening in both deficits this year. However, the Fund said India's policy of a market determined exchange risk aptly promoting flexibility, preserving monetary policy autonomy and giving the private sector fillips to mange currency exposures as the capital account opens further.

The Fund said the "favourable conjuncture and outlook" offer "a good opportunity to accelerate key reforms to support the Government's vision of reducing poverty and creating employment by boosting growth".

The Fund added that while India's gross FDI inflows have begun to rise, they have been partly offset by a pickup in outward investment by Indian corporates. Even as more reliance on debt and portfolio inflows has increased exposure to changes in global investor sentiment, India's large reserves and low external debt limit this risk.

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