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India's economic growth outlook has improved as impact of demonetisation is fading and some key reforms are paying off, but concerns are growing on corporate debt and banking system vulnerabilities, the IMF said Wednesday.
In its 'Surveillance Note' prepared for the G20 leaders ahead of their two-day summit on July 7-8 in Hamburg, Germany, the International Monetary Fund (IMF) said there is 'cautious optimism' about the global economy but policy efforts are still needed to strengthen the recovery.
"The global recovery continues, even as the composition of growth is shifting among the large economies... We expect global growth to be around 3.5 per cent this year and next," IMF Managing Director Christine Lagarde said.
Even though global growth momentum remains on track, the IMF said some of the forces driving the recovery are adding to already high vulnerabilities and external imbalances.
"At the same time, weak productivity growth and a lack of inclusiveness limit the growth outlook going forward," it said, adding that other downside risks include an abrupt adjustment of financial vulnerabilities and the risk of anti- globalisation sentiment feeding into inward-looking policies.
Touching upon the situation in emerging economies, including India and China, the IMF said the outlook remains for a pick-up in growth.
"In India, the outlook has improved as the impact of demonetisation seems to be fading and recent key structural reforms continue to pay off," the multilateral lender said.
As part of efforts to curb black money and corruption, the government demonetised old Rs 500 and 1,000 currency notes in November 2016.
However, the IMF has flagged vulnerabilities in the country's banking system.
"Among emerging economies elsewhere, reflecting the long period of favourable financing conditions, corporate leverage (eg, in India, Indonesia, and Turkey) and bank vulnerabilities (eg in India) increased as well," the report said.
Observing that there is scope for improving productivity and broadening economic opportunities for all, the IMF said in many emerging and advanced economies, higher investment in education, including through better use of public funds, would support long term growth.
According to the IMF, such investments would also help in opening up opportunities and enabling both social mobility and adjustment to structural economic shifts, including those arising from technology and trade.
"In emerging markets, financial inclusion (India), fighting corruption (Mexico), and health care reforms can have similar effects," it noted.
With respect to lower income countries and emerging markets like India, the report said the priorities include eliminating legal hurdles that prevent women from working, improving infrastructure and enhancing gender parity in access to health, education and skills training, and finance.
In a blog titled 'No Time to Stand Still: Strengthening Global Growth and Building Inclusive Economies', Lagarde said financial vulnerabilities present an immediate concern.
"After a long period of favourable financial conditions, including low-interest rates and easier access to credit, corporate leverage in many emerging economies is too high," she said.
Lagarde noted that in Europe, bank balance sheets still need repair following the Eurozone crisis while in China, a faster-than-projected expansion -- if it continues to be fuelled by rapid credit and increased spending -- would potentially lead to unsustainable public and private debt in the future.
"Left alone, this constellation of concerns could be a recipe for sudden financial distress, when the world's economies also continue to struggle with several longer-term problems," she said.