Growth prospects for India remain favourable despite a slowdown in the global economy, but the government should speed up structural reforms and relax supply constraints in the energy, mining, and power sectors, the International Monetary Fund said on Tuesday.
The Washington-based Fund marginally lowered India’s growth forecast to 7.3 percent this year, from its earlier estimate of 7.5 per cent, and said that a faster-than-expected deceleration in inflation provides leeway for modest cuts in interest rates.
“India is still a bright spot but that’s partly because the other emerging markets are not so bright,” Thomas Richardson, the IMF’s resident representative in India, told Reuters as the Fund released its latest World Economic Outlook.
Last month, the Reserve Bank of India cut its policy interest rate by a bigger-than-expected 50 basis points to a 4-1/2 year low of 6.75 per cent, front-loading monetary easing in an effort to stoke a slowing economy.
Since being battered by emerging market turmoil in 2013, India has brought down inflation and narrowed its external deficits.
But, with government borrowing high, the IMF says India should reform taxes and trim subsidies to narrow its budget deficit.
“Of the three fragile legs, two are now solid. The leg that is still fragile is the fiscal one,” Richardson said.
Finance Minister Arun Jaitley aims to cut the fiscal deficit to 3.9 per cent of gross domestic product in the current fiscal year ending March, and to 3.6 per cent of GDP in the 2016/17 fiscal year.
In the past, the country has met deficit targets through spending cuts that have undermined economic growth.
India expects the costs of major subsidies including oil, fertilisers and food grain to fall to 1.6 per cent of GDP in 2015/16 from 2.5 per cent of GDP in 2012/13, mainly as falling global commodity prices have let the government end diesel subsidies.
India should enhance financial sector regulation and efforts should be made to recover bad loans in the banking sector, the Fund said.
In order to boost investment, India needs to prioritise market-based pricing of natural resources and address delays in implementation of infrastructure projects, it said.
Prime Minister Narendra Modi is working on a fiscal package to revive power utilities, as the nearly Rs 4 trillion ($61.20 billion) that the state-run power distribution companies owe banks poses economic risk.
The Fund lowered its global growth forecast for 2015 to 3.1 per cent, 0.3 percentage point lower than in 2014, and 0.2 percentage point below its forecasts in the July 2015 World Economic Outlook.
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