IMF seeks reforms to offset slowdown

Reflecting the primarily cyclical slowdown, India’s growth is projected at 6.1% in 2019-20, lowest in seven years, and is expected to rebound to 7% in 2020-21, the International Monetary Fund has said. IMF’s growth estimate so far remains optimistic, given the sharp cut by other agencies including the Reserve Bank of India, which expects the economy to grow by 5% in 2019-20. IMF is expected to revise its estimate early next year.

IMF said in the near term, given the cyclical weakness of the economy, monetary policy should maintain an easing bias until the projected recovery takes hold. The economy grew 4.5% in the July-September quarter, its slowest pace in nearly six years.

The multilateral agency said fiscal stimulus should be avoided, considering fiscal space at risk and the requirement to offset revenue loss from the recent corporate tax rate cut. There have been calls to relax the fiscal deficit target of 3.3% of gross domestic product set for the current fiscal year to provide a boost to overall economic growth.

IMF said in the event of external pressures, India should continue to rely on exchange rate flexibility. Foreign exchange intervention should be two-way and limited to disorderly market conditions.

Stating that risks to the outlook are tilted to downside, IMF said key domestic risks include tax revenue shortfalls and delays in structural reforms. The main external risks pertain to higher oil prices, a sharp rise in risk premia in global financial markets, and rising protectionism.

“With its strong mandate, the new government has an opportunity to reinvigorate the reforms agenda, aimed at boosting inclusive and sustainable growth. A comprehensive reform package is needed to guide the economy on a path to the government’s goal of a $5-trillion economy in five years,” the report said.

It said for medium term, a credible fiscal consolidation path is needed to cut debt, free up financial resources for private investment, and reduce interest bill. To support adoption of a necessary medium-term fiscal consolidation, driven by subsidy-spending rationalisation and tax-base enhancing measures, revenue projections should be more realistic and fiscal transparency and Budget coverage should be enhanced.

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