International Monetary Fund has asked high inflation countries, like India to strengthen their fiscal and monetary policy frame work to tackle price rise.
Striking a cautious note on the global economy ahead of the G20 meet here, the multilateral agency has said domestic demand in many emerging markets has been weaker than expected, partly due to tighter financial conditions.
"On the monetary front, economies where inflation is still relatively high, or where policy credibility has come into question, need to continue tightening monetary policy in the context of strengthened policy frameworks (India and Turkey)," IMF said in a note prepared for the G20 leaders' meet starting on February 22.
Global economic activity has slowly witnessed an uptick on the back of improved prospects in the developed world, even as many emerging nations, including India, are facing challenges on multiple fronts.
Faced with persistently high inflation, India's central bank has embraced a hawkish monetary stance, although the economy is growing at a slower pace than previous years.
India's economic growth slipped to a decade low level of 4.5 per cent in 2012-13 and is expected to be better at 4.9 per cent in current fiscal.
Even though price rise is showing signs of moderation, wholesale inflation remained relatively high at 5.05 per cent.
The IMF said in India, growth should firm up further, thanks to project approvals by the Cabinet Committee on Investment (CCI). The CCI has cleared 296 projects worth Rs 6.6 lakh crore by January-end.
To promote financial stability and ensure sustainable medium-term growth, the IMF said India needs to remove supply bottlenecks to strengthen exports.
Key emerging economies (Brazil, India, and China), which were a main engine of global growth in recent years, are experiencing slower potential growth. In Brazil and India, the slowdown reflects infrastructure and regulatory bottlenecks, the IMF said.
"Infrastructure needs are high in emerging economies, especially those that are experiencing supply bottlenecks (eg: Brazil, India)," it added.
For India, the IMF further said, there was a need for sustainable fiscal consolidation and reorientation of spending toward investment and social sectors, requiring subsidy reform and an overhaul of taxation
"In emerging market economies, credible macro economic policies and frameworks, alongside exchange rate flexibility, are critical to weather turbulence," IMF said.
It said advanced economies premature withdrawal of monetary stimulus by advanced economies "will result in tighter external financial conditions, lower capital inflows, and possibly further bouts of volatility in capital flows for emerging economies." On the fiscal front, emerging economies need to ensure policy credibility.
