Drop in global oil prices windfall for Indian economy: IMF

Crude prices have plunged around 70% over the past 18 months to around $35 a barrel

Terming the slump in global oil prices as a "large windfall" for India, the International Monetary Fund (IMF) said this has allowed the country to spend more on goods and services, and a "sharp decline" in inflation.

"The collapse in global oil prices is a large windfall gain for India," Paul Cashin, head of the IMF team for India, said yesterday.

"The windfall has made room for more spending on goods and services, helped improve the external and fiscal positions, and allowed a sharp decline in inflation," he said.

Crude prices have plunged around 70 per cent over the past 18 months to around $35 a barrel.

In its latest report, the IMF projected India's GDP growth from 7.3 per cent this fiscal year to 7.5 per cent next year even as the economic recovery has been uneven.

The pick-up in the investment cycle is yet to gain strength, the banking system is weighed down by bad loans, and the weaker global economy has hit India's exports, it said.

IMF said as private investment continues to show only a few signs of revival, the challenge for India is to sustain its growth momentum.

An increase in public infrastructure investment and government initiatives to unclog stalled investment projects are helping bolster investor sentiment and having a positive impact on private investment, it said.

"Nonetheless, project implementation and supply-side challenges have been a drag on corporate investment for several years and they have chipped away at the financial strength of core industrial sectors, so the investment recovery is likely to be sluggish," Cashin said.

"Weakened bank asset quality and profitability means that banks are also becoming more cautious in their lending, which could hobble economic growth," he said.

He welcomed the Reserve Bank of India's recent steps toward more stringent recognition and more effective resolution of distressed bank loans as well as raising of banks' loan loss provisions.

According to IMF, with global growth weaker, India will have to continue to rely mainly on domestic demand as a key source of growth.

"Increasing capital buffers in public banks, which in our assessment is manageable even in a severe stress scenario, and implementing governance reforms in public sector banks along with the new bankruptcy law, are of key importance to ensure the durability of the Indian growth recovery," Cashin noted.

He said the adoption of the flexible inflation-targeting framework in early 2015 is a very positive development.

"The new framework is simple, has clear objectives and provides operational autonomy for the RBI in setting monetary policy," Cashin said.