IMF urges India to cut rates, reform more for revival

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The International Monetary Fund (IMF) has advised India for further monetary policy easing and broad-based structural reforms to reverse a cyclical demand slowdown. It cut its growth projection for India to 6.1 per cent for this fiscal from 7 per cent in July. IMF chief economist Gita Gopinath urged India to do a lot more despite appropriate steps taken.

“In India, growth softened in 2019 as corporate and environmental regulatory uncertainty, together with concerns about the health of the non-bank financial sector, weighed on demand," IMF said in its biannual World Economic Outlook (WEO).

The steps India needs to initiate include cleaning up the balance sheets of commercial banks, warding off the negative impact on growth from financial vulnerabilities.

“On the fiscal side, there have been some recent measures including the corporate tax cut. There has been no announcement on how that will be offset through revenues at this point. So, the revenue projections going forward look optimistic. But it is important for India to keep the fiscal deficit in check," Gopinath said.

The global economy is in a synchronized slowdown and IMF downgraded growth for 2019to 3 per cent, the slowest pace since the 2008 financial crisis, she said.

“Growth continues to be weakened by rising trade barriers and increasing geopolitical tensions. We estimate that the US-China trade tensions will cumulatively reduce the level of global GDP gross domestic product] by 0.8 per cent by 2020. Growth is also being weighed down by country-specific factors in several emerging market economies, and structural forces such as low productivity growth and ageing demographics in advanced economies," global newswires quoted her as saying.

India’s economy decelerated in the June quarter, held back by sector-specific weaknesses in the automobile sector and real estate as well as lingering uncertainty about the health of non-banking financial companies, IMF said in the report.

Growth in India will be supported by the lagged effects of monetary policy easing, a reduction in corporate income tax rates, recent measures to address corporate and environmental regulatory uncertainty and government programmes to support rural consumption, IMF said.

“A credible fiscal consolidation path is needed to bring down India’s elevated public debt over the medium term. This should be supported by subsidy-spending rationalization and tax-base enhancing measures. Governance of public sector banks and the efficiency of their credit allocation need strengthening, and the public sector’s role in the financial system needs to be reduced. Reforms to hiring and dismissal regulations would help incentivise job creation and absorb the country’s large demographic dividend. Land reforms should also be enhanced to encourage and expedite infrastructure development," the IMF document added.

Wednesday, 16 October 2019

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