(REOPENS FGN 14)

In their report, the IMF economists warned about threats posed by the financial sector. The number of non-performing loans has risen recently, and the current slowdown raises the prospect that this trend will continue for some time, it said. In the long run, ensuring India's financial system is able to underwrite strong growth will require pushing forward with financial reforms, such as developing the corporate bond market and gradually lowering government-mandated purchases by banks of government debt, the IMF said. Referring to the recently published 12th Plan that calls for major investments in infrastructure, health, and education, as well as for continued poverty reduction, IMF economists say reforms to facilitate investment�especially in infrastructure�together with lower costs to do business, are key to restoring high growth. "The government has already taken significant steps to restore growth, for example by laying out a plan to cut the losses of local power companies, creating the Cabinet Committee on Investment, and relaxing some restrictions on foreign direct investment," it said. "But more needs to be done," the IMF said. Addressing India's long-term energy needs, for example, will require solving complicated problems related to coal (which powers most of India�s electricity plants), while easing traffic jams will require facilitating the acquisition of land to widen roads or build new ones, it added. According to the IMF report, the slowdown in the Indian economy has been due to structural and supply-side factors, with cyclical and global factors also contributing. Capital inflows remain resilient suggesting that the financial channel has not been prominent in the transmission of external shocks. Mainly led by falling infrastructure and corporate investment, the slowdown has now generalised to exports and private consumption, it said. The current account deficit widened to 4.2 per cent of GDP in 2011-12, causing the rupee to depreciate sharply before its recent stabilisation. The financial positions of banks and corporates, both strong before 2009, have deteriorated. "With policy space strictly circumscribed because of high fiscal deficit and elevated inflation, the economy is in a weaker position than before the global financial crisis. "In recent months, the authorities have taken steps to reverse the slowdown, which have led to improved market sentiment," the IMF said. Continued implementation of measures to facilitate investment and slightly stronger global growth should deliver a modest rebound in the near term. Inflation is forecasted to remain above the Reserve Bank of India's comfort zone given that supply constraints are likely to ease only gradually.