India is now in “the midst of a significant economic slowdown” and the government must take “urgent policy” actions to reverse the slide in the growth, the International Monetary Fund (IMF) has said.
After lifting millions out of poverty, “India is now in the midst of a significant economic slowdown,” Ranil Salgado of the IMF Asia and Pacific Department, told reporters as it released its annual staff report on India. The report was done in August when the IMF was not fully aware of India’s current economic slowdown.
Stating that the IMF was surprised by India’s economic slowdown, he added that, “We still believe it is mostly cyclical, not structural… because of the financial sector issues, we think, the recovery will be not as quickly quick as we thought earlier. That’s the main issue.”
Calling for urgent reforms in the financial sector, the IMF official said, “We think a more comprehensive financial sector resolution plan or act is needed. There were earlier thoughts in this area by the government and we think those should be pursued again because there are certain complications related to the financial sector that doesn’t necessarily work well in a simple kind of insolvency and bankruptcy code. It would be important to have a more comprehensive framework specifically for the financial sector.”
Declining consumption and investment along with falling tax revenue have hindered the growth in India.
The IMF, which estimates India’s economy will expand 6.1% in the year through March, is set to reduce the prediction amid continuing weakness signalled by a decrease in rural consumption and lower business sentiment, Chief Economist Gita Gopinath had said in an interview last week.
“Reserves have risen to record level. The current account deficit has narrowed. Inflation, although we have a little jump right now because of vegetable prices, we think (it) has been under control for the last few years. So, by other measures, India is doing quite well. The issue is primarily how to address the growth slowdown,” Salgado said.
India’s GDP hit a 26-year-low as it grew at 4.5 per cent in July-September this year. Most high-frequency indicators suggest that weak economic activity has continued into December, Salgado said while attributed this to the abrupt reduction in non-bank financial companies’ (NBFC) credit expansion and the associated broad-based tightening of credit conditions.
Noting that the IMF believes that India has fiscal base at-risk, Salgado said that as a result, New Delhi’s ability to use fiscal policy for stimulus is very limited. “India already has relatively high general government deficits and general government debt,” he added.
(With inputs from PTI)
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