Macro Economy

To reap the demographic dividend, India should focus on labour, land reforms: IMF

Shishir Sinha New Delhi | Updated on December 24, 2019 Published on December 24, 2019

The report said that the macro-economic outlook is more subdued and uncertain than in recent years.

International Monetary Fund’s (IMF) executive board has advised India to complement its effort to strengthen the business climate by continued labour, product market, land and other reforms aimed at increasing labour market flexibility, enhancing competition and reducing the scope for corruption.

“This will help harness India’s demographic dividend by creating more and better jobs for the rapidly-growing labour force and enhancing female labour force participation,” board said in its assessment.

The board comprises of 24 directors who are elected by member countries and the Managing Director who serves as its Chairman. Under Article IV of the IMF’s Articles of Agreement, this board holds consultation and accordingly an assessment report is prepared.

The report noted the recent changes in economic parameters and policies and listed risks. It believes that risks are tilted to downside and include tax revenue shortfalls and delays in structural reforms.

Also read: Policy certainty, structural reforms are key to growth: IMF’s Gita Gopinath

Credit growth could also remain subdued, as there is a perception of increased risk aversion among banks and the implementation of the recently announced PSB consolidation could divert focus and weigh on near-term credit growth.

The main external risks pertain to higher oil prices, a sharp rise in risk premia in global financial markets and rising protectionism globally.

Subdued outlook

The report said that the macro-economic outlook is more subdued and uncertain than in recent years. Growth is projected at 6.1 per cent in FY2019-20. Investment and private consumption are expected to firm in the second half of the fiscal year.

This is expected to be supported by the lagged effects of monetary policy easing, the recent measures to facilitate monetary policy transmission and address corporate and environmental regulatory uncertainty, and government programmes to support rural consumption being rolled out.

Also read: Underlying causes of the economic slowdown

Growth is projected to gradually rise to its medium-term potential of 7.3 per cent on continued commitment to inflation targeting, gradual macro-financial and structural reforms, including implementation of reforms which were initiated earlier — such as the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC) — as well as ongoing steps to liberalise FDI flows and further improve the ease of doing business.

Inflation is projected to remain around 3.4 per cent, with the effect of subdued demand broadly offsetting dissipating base effects of low food prices. The current account deficit is projected to narrow marginally, to 2 per cent of GDP.

The balance of payments would return to surplus, on returning capital inflows thanks to more accommodative global financial conditions.

The rise in protectionism and the retreat from multilateralism could affect India directly through the trade channel, and indirectly through confidence effects and related effects on financial markets.

Also read: Moody’s cuts India’s GDP growth forecast to 5.6 per cent for 2019

While there may be trade diversion toward India from the US-China tariff escalation, the macroeconomic impact is expected to be small, given India’s relatively low trade openness and less diversified exports base.

The report highlighted the fact that inflation targeting (4 per cent with 2 per cent swing in both directions) has contributed to macroeconomic stability by better anchoring inflation expectations, thus helping improve the economic well-being of low-income households.

It suggested that transmission of policy rate cut (1.35 per cent since February) should be improved to “enhance the effectiveness of monetary policy and enable the central bank to achieve the medium-term inflation target on a sustained basis.”

Challenges ahead for financial sector

Directors in the board welcomed the steps taken to tackle the twin bank and corporate balance sheet problem, but noted that the continued challenges of the financial sector.

They recommended that the recently announced public sector bank merger plan be accompanied by deep operational restructuring and far-reaching governance reforms in order to improve efficiency, risk management, and credit allocation.

The directors welcomed the strengthened monitoring and regulation of non-bank financial companies and recommended enhancing the availability of timely and granular data to help restore confidence in the sector.

Published on December 24, 2019
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