IMF Calls For Targeted Fiscal Support In India
The International Monetary Fund, as part of its Article IV consultation on India, has called for continued targeted fiscal support till the recovery is entrenched.
While the Indian economy has recovered and is seen growing at 9.5% in the current financial year and 8.5% next year, the "economic outlook remains clouded due to pandemic-related uncertainties," the IMF said.
"A persistent negative impact of Covid-19 on investment, human capital, and other growth drivers could prolong the recovery and impact medium-term growth," the fund cautioned.
While India benefits from favourable demographics, disruption to access to education and training due to the pandemic could weigh on improvements in human capital.IMF Article IV Consultation On India
The fund called for continued targeted fiscal support despite the widening of budget gaps. The general government fiscal deficit, which includes central and state governments, is seen at 12.8% of GDP in FY21.
Continued support is warranted until the recovery is secure. This fiscal support should be underpinned by targeted spending on social protection, employment support and health spending, the IMF said.
The fund "encouraged the authorities to increase public expenditure in infrastructure, education, health, and social safety nets which can also help achieve the Sustainable Development Goals and boost potential growth."
It added that fiscal space can be enhanced through a credible and clearly communicated medium-term fiscal consolidation strategy.
Commenting on monetary policy, the IMF said that accommodative monetary policy remains appropriate in India for now but elevated inflation pressures need to be closely monitored.
A well-communicated plan for a gradual reduction in monetary policy support would foster orderly market transitions.
Looking ahead, a well-communicated plan for a gradual reduction in monetary policy support as the recovery strengthens would foster orderly market transitions.IMF Article IV Consultation On India
While targeted support to viable corporates should continue, policies facilitating the exit of non-viable firms are also warranted, the fund said. It added that adequate bank capitalisation and effective bad loan resolution will help support the recovery.
The IMF, which in the past has been critical of India's exchange rate policies, welcomed the commitment to maintain exchange rate flexibility. This can serve as a shock absorber, with foreign exchange interventions limited to addressing disorderly market conditions, it said.
The fund also acknowledged ongoing reforms in areas such as labour and land, infrastructure investment and trade, among others. "Such reforms would not only help maximize India’s long-term growth and demographic dividend, but also help alleviate poverty and inequality, and deepen the country’s integration into global value chains."