Same IMF mantra for next India government - reforms

The International Monetary Fund's prescription for the new Indian government emerging from the general elections would be the same -- structural reforms to revive growth and raise the long-term growth potential.

"Traditionally, India has grown 7-8-9 percent and we see no reason why it can't go back to those sort of levels," Paul Cashin, the IMF's mission chief to India, said in a conference call Thursday on the IMF's annual health check-up of India's economy.

"Introducing the Goods and Services Tax (GST) and some other tax reforms, introducing subsidy reforms," he believed, "really could be a game changer in terms of fiscal sustainability".

Joining the call from New Delhi, Resident Representative Thomas Richardson said: "IMF will work with whichever government is in power. We don't have any views on the politics of it."

"Our advice to India would be the same regardless," he said suggesting structural reforms on the fiscal front to "further India's sustainability and reduce vulnerability".

"Some people have argued they would like India to sign a free trade agreement with itself removing internal trade borders," Richardson said, "that would certainly enhance growth across the country".

Noting that India's growth has slowed markedly and inflation remains stubbornly high, the IMF's report on its annual Article IV Consultation with India has suggested broader structural reforms.

"The principal risk facing India is the inward spillover from global financial market volatility," the report said.

"Protracted economic and financial volatility, triggered by advanced economies' exit from unconventional monetary policies, a lengthy Euro area growth slowdown, and higher oil prices are the main external risks."

Slow progress on structural reforms, high inflation, failure to ease supply constraints, and resorting to expansionary fiscal policy are key domestic downside risks, it said.

"On the upside, going beyond announced reforms or faster-than-envisaged legislative progress would lead to higher growth and reduce economic vulnerabilities," the IMF said.

Executive directors of the 186-member international institution also "commended the Indian authorities for their ability to maintain macroeconomic and financial stability amid a challenging macroeconomic landscape".

The IMF directors welcomed ongoing efforts, including recent policy initiatives, to reduce external vulnerabilities, rebuild buffers, and revive investment.

They noted, however, that "growth has slowed markedly and inflation remains persistently high, while spillovers from global financial market volatility continue to pose a significant risk".

The IMF stressed that reviving growth and raising the long-term growth potential require broader structural reforms to improve infrastructure, the business climate, and the pricing and allocation of natural resources.

Projecting India's growth at 4.6 percent for fiscal year 2013-14, the IMF said it should pick up to 5.4 percent in 2014-15 at factor cost.

"Stronger global growth, improving export competitiveness, a favourable monsoon, and a confidence boost from recent policy actions should deliver a modest growth rebound," it said.

However, fiscal restraint and a tighter monetary stance will act as headwinds, slowing the recovery, the IMF staff report said.

(Arun Kumar can be contacted at arun.kumar@ians.in)