 "The International Monetary Fund (IMF) logo is seen at the IMF headquarters building during the 2013 Spring Meeting of the International Monetary Fund and World Bank in Washington")
Staff of the International Monetary Fund (IMF) on Thursday cautioned corporate and bank balance sheet problems, slow reforms and sluggish exports in India might pull down economic growth.
“...headwinds from weaknesses in India’s corporate and bank balance sheets, a decelerating pace of reforms, and sluggish exports will weigh on growth,” IMF staff said in its surveillance note for the two-day G-20 finance ministers and central bank governors meetings, beginning Saturday in Chengdu, China. The fund clarified that views expressed in the note do not necessarily reflect the views of the IMF executive board.
The note said corporate leverage had risen significantly in India and other emerging economies in domestic and foreign currencies, against the background of ample global liquidity. A strong pullback of capital flows to emerging economies could tighten financial conditions and weaken their currencies, with the possibility of significant adverse corporate balance sheet effects and funding challenges posing significant repercussions for the banking system. Besides, the note said the quality of fiscal consolidation in India should be improved through a comprehensive tax reform such as introduction of the goods and services tax and improving tax administration and measures to further reduce subsidies.
With shrinking fiscal buffers, many commodity exporters should develop new growth models and tackle fiscal adjustment, stronger fiscal frameworks, and by mobilising new sources of revenues, it said. Exchange rate flexibility can usefully cushion the impact of adverse external shocks, provided the effects of currency depreciations on balance sheets and domestic inflation rates are contained, it said.
However, on broader macroeconomic terms, IMF staff said India’s economy is on a recovery path, helped by lower oil prices, positive policy actions and improved confidence. Steps to relax long-standing supply bottlenecks — especially in the energy, mining, and power sectors — as well as labour market reforms were crucial for India to achieve faster and more inclusive growth. It recommended raising public investment efficiency, addressing trade and foreign direct investment impediments, improving governance of public institutions and other institutional reforms for India.
The note said implementing further subsidy and social spending reforms would create policy space to support other supply-side reforms in the country. It wanted India to strengthen the framework for contract enforcement.
Two days ago, IMF had in its latest update on World Economic Outlook scaled down India’s economic growth projections by 0.1 percentage point to 7.4 per cent for the current financial year and 2017-18, due to a slower-than-expected investment revival.
The surveillance note said with Brexit very much unfolding, more negative outcomes were a distinct possibility.
