India – Results of an annual assessment of the Indian economy released by the International Monetary Fund (IMF) on Wednesday, reveal that the Indian economy is reviving.
IMF Mission Chief for India Paul Cashin says that growth numbers are now much higher and the current account deficit is comfortable, in part due to the fall in gold imports and lower oil prices.
This is being helped by positive policy actions that have improved confidence and by lower global oil prices.
To continue on this trend, India needs to revitalize the investment cycle and accelerate structural reforms in sectors such as agriculture, mining, power and labour, the report says.
The Indian economy is the bright spot in the global landscape, becoming one of the fastest-growing big emerging market economies in the world with new investment project announcements picking up, particularly in the power and transport sectors.”
Cashin also notes that bolstering financial sector health and further financial inclusion would support growth going forward.
While the country is well placed to cope with external shocks, there are possible risks on the horizon, both external and domestic.
“External shocks such as spillovers from weak global growth and potential global financial market volatility could be disruptive, including from any unexpected developments as the US begins to raise its interest rates,” says Cashin.
On the domestic front, the weaknesses in corporate balance sheets—especially in light of the increase in corporate leverage of the past few years—and worsening bank asset quality bear watching, as they could weigh on growth.
Growth forecasts higher
India’s economic profile recently got a lift as the country improved the way it measures economic output.
Based on this revised GDP, the IMF forecasts growth will strengthen to 7.2% in 2014/15 and rise to 7.5% in 2015/16, driven by stronger investment following improvements to the business climate.
“The revised growth figures support our view that economic recovery in India is under way, albeit pointing to a somewhat faster pace than we, and others, previously believed,” Cashin says.
He says that these GDP revisions portray a more resilient performance of the services and manufacturing sectors of the economy
But while public and private consumption look stronger, he added, investment activity continues to be held back by structural and supply-side constraints.
Inflation has fallen by half to around 5%, after hovering around 10% for several years.
The report commended the Reserve Bank of India (RBI) for its steps to tighten monetary policy by raising interest rates during 2013–2014, as well as the government’s efforts to contain food inflation, including by releasing buffer stocks of cereal and keeping agricultural procurement prices in check.
“The government’s recent move to introduce a flexible inflation-targeting framework is a clear positive,” says Cashin. “It will help deliver low and stable inflation, and diminish the prospect of renewed bouts of high inflation.”
More solid fiscal footing
The government has made strong efforts to put its public finances on solid footing, with the central government’s fiscal deficit falling to 4.1% of GDP in 2014/15, helped by lower oil prices. By creating space for higher infrastructure spending, fiscal reforms can have a major impact on economic growth.
“The government’s continuing emphasis on fiscal discipline is commendable,” Cashin notes.
The government has recently deregulated diesel prices and raised natural gas prices. The report suggests, however, that tax revenues can be increased, including through better tax administration, and spending controlled through further streamlining of subsidies.
In addition, boosting spending on infrastructure, such as roads and ports, electricity transmission, and social spending (public health, education) would improve the quality of expenditure.
Toward a brighter economic picture
Within the next 15 years, India will have the largest, and among the youngest, workforces in the world, and will need to create jobs for the roughly 100-million young Indians who will enter the job market in the coming decade.
Raising India’s growth rate and ensuring it begins to generate sufficient jobs requires deeper structural reforms.
While the Indian government’s efforts to improve the business climate has gained momentum, the country needs to implement reforms in the following key areas:
- addressing bottlenecks in the energy, mining and power sectors;
- increasing investment to help close India’s major infrastructure gaps;
- taking further steps to simplify and expedite the process of acquiring land and obtaining environmental clearances;
- reforming the agriculture sector to ensure greater efficiencies in the public system for food procurement, distribution, and storage;
- making labour markets more flexible, to encourage young job-seekers and boost presently low female labour force participation; and
- improving education to meet rising shortages of skilled labour.
“Moving the economy forward in these directions will help India continue along the path toward a brighter economic picture of rapid economic growth and macroeconomic stability for many years to come,” Cashin says.