The International Monetary Fund (IMF) has said India's potential is enormous but it needs to continue with reforms to remain in the economic `sweet spot' while reiterating its forecast that the country's growth will pick up marginally next year.
In its annual Article IV consultation report released on Wednesday, IMF said the Indian economy is on a recovery path, helped by lower fuel and commodity prices and positive policy action from the government.
IMF expects Indian economy to grow 7.3% this year and 7.5% next fiscal, making it “one of the fastest-growing large economies in the world“. India's official statistics show the economy growing 7.6% in FY16. IMF credited the NDA government with improved economic management.Increase in public infrastructure investment and initiatives to reinvestment and initiatives to unclog stalled projects have bolstered investor sentiment and encouraged private investment, it said. IMF took note of the government's commitment to fiscal consolidation also.
IMF however, cautioned that the recovery has been uneven and there were downside risks.
It listed NPAs and weak private sector balance sheet as vulnerability.Banks have become more cautious in lending, which could become a growth drag, the IMF said while welcoming the Reserve Bank of India's drive for more stringent recognition and resolution of bad loans. The high fiscal deficits and upside risks to inflation constrain the scope for countercyclical policies, it said.
There are external risks as well, such as deterioration in global growth and more.
IMF said the goods and services tax was a priority and further labour and energy reforms will improve productivity. Tax revenues can be increased further, including through better revenue administration. Better targeting of food and fertiliser subsidies would save substantial funds, it said, and called for reform of Food Corporation of India. IMF also urged the government to address long-standing supply bottlenecks, labour and product market reforms, and further improving the business climate to boost potential growth and generate jobs.