Chennai: India’s strong economic performance provides an opportunity to advance critical and challenging structural reforms to realize India’s ambition of becoming an advanced economy by 2047, finds the IMF.
Broad structural reforms are needed to support private investment, job creation, and medium-term growth. Near-term priorities include labour market reform, further reductions in trade restrictions, continuing the public investment push, and providing strong policy frameworks for a stable economic environment. Other priorities include pursuing agricultural, land, and judicial reforms; strengthening education, skilling, public health, and social safety nets; reducing the public sector footprint in credit markets and other obstacles to investment and creation of high-quality jobs; and implementing climate policies
IMF emphasized that comprehensive structural reforms are crucial to create high-quality jobs, invigorate investment, and unleash higher potential growth. Efforts should also focus on strengthening human capital, and supporting greater participation of women in the labour force.
Boosting private investment and FDI is also vital and will require stable policy frameworks, greater ease of doing business, governance reforms, and increased trade integration which should include both tariff and non-tariff reduction measures with all parties involved. In this context, the IMF welcomed India’s recent tariff reductions, noting that these can enhance competitiveness and foster India’s role in global value chains.
Prudent macroeconomic policies have supported India’s economic resilience, with growth expected to recover from a recent softening and inflation expected to converge to target. Risks to the outlook include deepening geo-economic fragmentation and a slower pace of domestic demand recovery. Policy priorities should include continued rebuilding of fiscal buffers, gradual and data-dependent easing of monetary policy, further strengthening of financial resilience, and advancing comprehensive structural policies to invigorate investment, boost the quantity and quality of employment, and raise potential growth.
The planned near-term fiscal consolidation is appropriate. Continued rebuilding of fiscal buffers is needed through the medium term, with ongoing focus on raising domestic revenue to meet India’s significant needs for capital and other development spending.
Monetary policy has been broadly appropriate. With inflation likely to converge to target and a broadly closed output gap, room should arise for gradual monetary policy rate cuts, with timing and pace remaining data dependent. India’s successful flexible inflation targeting regime should be supported by allowing for greater exchange rate flexibility.
Systemic financial risks are broadly contained but further reform and vigilant supervision are needed to address remaining pockets of vulnerability. Efforts to strengthen the oversight framework, monitor system interconnectedness, and improve crisis management tools can help further enhance financial stability.