The International Monetary Fund (IMF) growth projection for the fiscal 2012-13 at 5.4 per cent, against the latest RBI downward revision to 5.5 per cent, is not surprising.

What is surprising is that the IMF economists’ annual health check of India’s economy as part of its Article IV Agreement, described this decline in growth “as a far larger drop than might be expected”. Besides it warned that India’s growth rate is likely to “decline further in the coming year for a range of domestic reasons”.

To show that the slowdown is not due to to “domestic reasons”, India may argue that due to its integration into the global economy, the transmission effects of global headwinds have hurt its growth prospects.

This is a point pertinently put across by India’s Executive Director to the Fund Rakesh Mohan in a statement at the recent Board of Directors meeting there. Stating that the Indian authorities have not hesitated to take “several politically sensitive measures, including adjustments in fuel prices”, Mohan asserted that the extant lead indicators do suggest that the slowdown has bottomed out and growth prospects should only be improving.

He hastened to add that the improvement in domestic growth will also be contingent on the global economic outlook.

Although India has not been borrowing from the Fund and has contributed to shoring up IMF’s lending base in its coordinated recovery strategy of G-20, the Fund’s macro-economic concerns of its members are always heeded to.

To this limited extent, some of the suggestions emanating in the IMF 2013 Article IV Consultations do deserve a study by the authorities.

Over the long haul, for ensuring that India’s financial system is able to underwrite strong growth, financial reforms have to be pushed forward. This would include developing the corporate bond market and gradually lowering government-mandated purchases by banks of government debt, IMF said.

It assailed the high Statutory Liquidity Ratio (SLR) in India which entails large holdings of government securities on financial institutions’ balance sheets, which results in crowding out private sector investment.

The SLR holding of banks was brought down over time from 38.5 per cent of net demand and time liabilities of banks (NDTL) in the early 1990s to 23 per cent now.

But the Fund says that since banks can keep 25 per cent of NDTL in government securities (G-Sec) without marking to market and with insurance companies and pension funds enjoying analogous but higher requirements, the effective SLR for the whole economy is around 50 per cent of financial sector liabilities.

This “assured source of financing for government” needs to be moderated, with the Fund estimating that a 10 percentage point reduction in the effective SLR likely lowering the borrowing costs for the private sector by around 100 basis points (bps), while increasing the borrowing costs for the government by 50 bps over the medium term.

IMF contends that reducing the effective SLR by 10 percentage points would reduce foreign borrowing by corporates by around four per cent in the medium term.

The Indian private sector is today sore over inexorable interest cost and blockage of funds due to captive borrowings by the government for its massive consumption expenditure including non-merit subsidies on fuel.

Ironically, Mohan told the Fund that its recommendation for reduction in the SLR was “intriguing” since “the financial stability enhancing role played by the SLR by boosting the liquidity buffers of banks is important”.

Policy analysts are puzzled by this logic as continued high SLR and high interest cost act as a double whammy on India Inc with little let-up in sight.