Reforms in India not fast enough, says IMF

Out of nine 'reform priorities' taken under consideration by the IMF for various countries, India has been found to have done well on three

Listing out as many as six core areas that need further reforms in India, International Monetary Fund (IMF) said in a 'Note on Global Prospects and Policy Challenges' that headwinds from weaknesses in the country's corporate and bank balance sheets, decelerating pace of reforms and sluggish exports may weigh on its economic growth.

The IMF, which recently lowered its gross domestic product growth projection for India to 7.4% in the current financial year, said the country's economy is on a recovery path, helped by lower oil prices, positive policy actions and improved confidence.

The note has been prepared for the two-day meeting, ending on Sunday, of the G20 Finance Ministers and Central Bank Governors' Meetings being held in Chengdu, China.

The IMF, which has also lowered its global economic growth forecast for 2016 and 2017 by a marginal 0.1% to 3.1 and 3.4% respectively, recommended six 'reform priorities' for India, which is higher than the same for several other emerging markets including China, Brazil and South Africa.

The key areas where the IMF has recommended further reforms for India include product market, labour, infrastructure, banking, legal system and property rights, and fiscal structural reforms.

Out of total nine 'reform priorities' taken under consideration by the IMF for various countries, India has been found to have done well on three — innovation, capital market development and trade/FDI liberalisation.

In case of China and South Africa, the IMF has recommended further reforms in five key areas each, while it is higher at seven for Russia. For Brazil, the IMF has sought reforms in just three core areas.

Among advanced economies, the IMF Note recommends further reforms in five core areas each for the US and the UK.

The IMF further warned there is a risk that emerging economies do not reduce vulnerabilities and rebuild buffers sufficiently before capital flow reversals materialise.

Stating that corporate leverage has increased significantly in some emerging economies, including India, in domestic and foreign currency against the background of ample global liquidity, the IMF said a strong pullback of capital flows to emerging economies could tighten financial conditions and weaken their currencies.

This may lead to a possibility of significant adverse corporate balance sheet effects and funding challenges, and significant repercussions for banking systems, it added.

It further said, "The quality of fiscal consolidation in India should be improved through a comprehensive tax reform (such as introducing the goods and services tax and improving tax administration) and measures to further reduce subsidies."

"With shrinking fiscal buffers, many commodity exporters need to develop new growth models and tackle fiscal adjustment including through reduced but more efficient public expenditures, stronger fiscal frameworks, and mobilising new sources of revenues," it added.

It opined that emerging economies can continue to be a strong locomotive of global economic and trade growth through well-sequenced structural reforms, if vulnerabilities are addressed.

About India, the IMF also said further steps to relax long-standing supply bottlenecks (especially in the energy, mining, and power sectors) as well as labour market reforms, are crucial to achieving faster and more inclusive growth.