Do more to fight inflation: IMF

February 21, 2014 - 6:18:30 am
MUMBAI: India needs to raise borrowing costs, narrow its fiscal deficit and remove supply bottlenecks if it is to pick up lagging economic growth, the International Monetary Fund warned yesterday.

Dealing with its worst slowdown in a decade, India faces both external risks from volatile global markets as well as key domestic concerns, such as persistently high inflation, the IMF said after consultations with the government.

It produced a report and accompanying press release based on these consultations.

Despite three interest rate hikes by the Reserve Bank of India since September, the authorities should prepare for further raises to tackle worrying consumer prices, the IMF said in the release.

The country should “stand ready to raise the policy rate further so as to bring down inflation to more sustainable levels,” it said.

Asia’s third-largest economy grew at 4.5 percent last year.

It is facing shrinking manufacturing, low employment growth, and sizeable current account and fiscal deficits.

In the interim budget announced on Monday, the government announced that it had successfully cut expenses to keep the fiscal deficit at 4.6 percent of the gross domestic product against estimates of 4.8 percent.

But the IMF said there was more work to be done.

“Further fiscal consolidation is needed. Tax and subsidy reforms will be required to durably lower fiscal imbalances,” it said.

The Congress-led government of Prime Minister Manmohan Singh is expected to receive a severe drubbing in the upcoming elections and is desperate to control inflation and improve public finances while trying to boost growth.

Finance Minister P Chidambaram had described the lifting of “140 million people out of poverty” as the 10-year-old government’s greatest achievement.

But the IMF said that India could grow faster if a range of reforms were implemented.

“Directors stressed that reviving growth and raising the long-term growth potential require broader structural reforms to improve infrastructure, the business climate, and the pricing and allocation of natural resources,” said the note.

“They also saw as key priorities reforms aimed at boosting agricultural productivity and supporting formal job creation, by relaxing labour laws and addressing skills mismatches.”

The IMF said, however, that the biggest risk to the country came from global financial market volatility, such as the US tapering its stimulus programme, leading to billions of dollars being pulled from emerging markets.