Expressing satisfaction with India’s economic management, the International Monetary Fund believes the country may well be on the road to recovery, closing 2015-16 with 7.3 per cent growth and clocking 7.5 per cent in 2016-17.
“The Indian economy is on a recovery path, helped by a large terms of trade gain (about 2.5 per cent GDP), positive policy actions, and reduced external vulnerabilities,” the IMF said on Wednesday after concluding its Article IV consultations with India.
Appropriate policy actions by the Government, along with favourable terms of trade, have underpinned India’s improved economic performance and reduced external vulnerabilities, the IMF’s Executive Directors noted in their annual assessment.
As they put it, the policy measures to help reduce fuel and fertiliser subsidies, continue with fiscal consolidation, bolster the financial system, and strengthen the business climate have all helped enhance confidence in the economy.
In particular, they welcomed the recent measures to increase public infrastructure spending, rationalise subsidies, create more flexible labour and product markets, and enhance financial inclusion.
Plummeting oil prices have turned out to be a large windfall for India, making room for more spending on goods and services and helping the country improve its external and fiscal positions amid a sharp decline in inflation, said Paul Cashin, IMF head for India.
While the collapse of global oil prices since late 2014 has boosted economic activity in India, the IMF noted that a range of supply-side measures, including release of surplus grain buffer stocks, and an appropriate monetary stance have also helped bring down inflation from about 9.5 per cent during the 2011-13 period to 5.6 per cent by December 2015.
looking forward, however, the IMF sounded a note of caution that global financial market volatility, a potential further deterioration in exports and strains in bank and corporate balance sheets could weigh on India’s growth prospects.
Given this backdrop, the Directors called for continued vigilance, growth-friendly fiscal consolidation, and sustained reforms to enhance the resilience of the economy and bolster potential growth. They also asked the Government to address supply constraints and further improve the business environment.
Noting that India’s international reserves are assessed to be adequate, they “encouraged the authorities to sustain the reform momentum to further enhance investor confidence and attract foreign direct investment, while cautiously liberalising external commercial borrowings by the private sector”.
For all the positive projections, the IMF also sought to highlight the fact that India’s economic recovery has been “uneven” with the pick-up in investment cycle yet to gain strength.
“The banking system is weighed down by bad loans, and the weaker global economy has hit India’s exports. There are also external risks. A further deterioration of the global growth outlook could weigh on the country’s growth prospects,” noted an article in the IMF Survey.
It quoted Cashin as saying that “spillovers from global financial market volatility could be disruptive, including from unexpected developments in the course of US monetary policy normalization or China’s growth slowdown”.