India needs to reduce subsidies, implement comprehensive tax reforms and a maintain a tight monetary policy to maintain its growth momentum, IMF said today, while it forecasted growth rates below the government's estimates for the current and the next fiscal.
In its annual assessment report on India, IMF today projected GDP growth of 7.2 per cent in the current fiscal ending this month, followed by 7.5 per cent growth in 2015-16.
However, the IMF estimates for both the years are below the projections made by the government, which has forecasted a growth rate of 7.4 per cent in 2014-15 and of 8-8.5 per cent in 2015.16, which were also announced by Finance Minister Arun Jaitley in his Union Budget last month.
IMF has revised upward its growth projections, while taking into account the new GDP methodology adopted by India, from its earlier estimates of 5.6 per cent and 6.4 per cent for the fiscals 2014-15 and 2015-16, respectively.
IMF suggested that India should keep its monetary policy tight as underlying inflationary pressures and upside risks remain, while it also called for continued and "quality" fiscal consolidation, comprehensive tax reforms and measures to further reduce subsidies.
IMF said that India's near-term growth outlook has improved and the balance of risks is now more favorable, helped by increased political certainty, several policy actions, improved business confidence, lower commodity import prices, and reduced external vulnerabilities.
"Nonetheless, high inflation expectations and wide fiscal deficits remain key macroeconomic challenges, resulting in limited policy space to adopt countercyclical policies.
"Supply-side bottlenecks and structural challenges -- particularly in the agriculture, mining and power sectors -- constrain medium-term growth and hinder job creation.
"Risks are still tilted to the downside, with the main external risk stemming from surges in global financial market volatility.
"On the domestic side, a further weakening of bank and corporate balance sheets could pose risks to economic recovery and weigh on financial soundness. Sustained low global energy prices constitutes an upside risk to growth and downside risk to inflation, and would help contain both external and fiscal imbalances," it added.
In its key policy recommendations for India, IMF said that the underlying inflationary pressures and upside risks remain and the monetary policy should remain tight to reduce inflation and inflation expectations durably.
It also pitched for continued fiscal consolidation and said that the "quality of the consolidation should be improved, underpinned by comprehensive tax reform and measures to further reduce subsidies".
"To safeguard financial stability in the presence of rising corporate and banking sector strains, regulation should be further enhanced, provisioning increased, monitoring of corporate vulnerabilities strengthened, and debt recovery by banks further encouraged," IMF said.
"While several policy actions have been taken recently, further steps in relaxing long-standing supply bottlenecks, especially in energy, mining and power sectors, as well as labor market reforms, are crucial to achieving faster and more inclusive growth," it added.