India Should Focus On Clean Up Of Banks, Labour Reforms: IMF’s Gita Gopinath

With India’s economic growth slowing to a six-year-low, International Monetary Fund’s Chief Economist Gita Gopinath said the government should undertake structural reforms, such as bank clean-up and labour, reforms to address the slowdown in domestic demand.

Gita Gopinath, 48, who is travelling to India this week, rooted for government policies focusing on managing a slowdown in domestic demand, and on boosting productivity growth and supporting job creation in the medium term.

"Given the cyclical position and the structural challenges of the Indian economy at this point, we recommend that policies focus on managing the slowdown in domestic demand, and on boosting productivity growth and supporting employment creation in the medium term," she told Press Trust of India in an interview.

Recommending a series of key policy priorities for the Narendra Modi government, she said, "Politically, the time—early in the government's second term—is right for a structural reform push."

India’s GDP growth slowed to 4.5 percent in the July-September period, the sixth consecutive quarter of declines, as manufacturing slumped on low consumption.

Kolkata-born Gopinath said the policy priorities of the government should also include a credible fiscal consolidation path that is more ambitious than currently envisaged by the government.

"This is needed to reduce the high level of debt and reduce crowding out which would free up financial resources for private investment. This should be driven by subsidy-spending rationalisation and tax-base enhancing measures," Gopinath said.

Responding to a question, Gopinath said India's medium-term vision to become a $5 trillion economy, which focuses on boosting investment, is appropriate. And so is the commitment to support the rural economy, boost infrastructure spending, streamline goods and services tax, direct tax reforms, and pursue a business-friendly policy agenda.

In this regard, Gopinath advocated, among others, three policy priorities for the Modi government.

First, is to accelerate the clean-up of banks, other financial institutions, and corporate balance sheets and enhance governance of public sector banks to revive bank credit and enhance the efficiency of credit provision, while monitoring closely emerging risks from the liquidity stress in non-banking financial companies and enhancing their supervision and regulation.

The Indian-American called for continued fiscal consolidation over the medium term—both at the centre and state levels—to lower elevated public debt levels, supported by further steps to increase tax compliance and administration, as well as improve fiscal transparency.

And finally, labour, land, and product market reforms aimed at enhancing competition and governance, along with infrastructure investment, should be a priority to create more and better jobs for India's young and rapidly growing labour force.

"Improvements in health and education are essential for broad-based inclusive growth," Gopinath said.

"The extent of the slowdown of the Indian economy has surprised many, including us here at the IMF. Growth slowed further to a six-year low of 4.5 percent (year-on-year) in the second quarter of 2019-20, from 5 percent (year-on-year) in the previous quarter. A sharp moderation of investment, slowing consumption growth, and an inventory rundown contributed to the slowdown," she said.

"We see several factors underlying the weakness of consumption and investment," said IMF's chief economist. "Rural income growth has been weak. Good monsoon rainfall, agriculture sector reform, and food management improvements have pushed down food prices. The low food prices represent a positive development in that they have supported the efforts of RBI to keep inflation under control."

She said low food prices hold back farmers' income and thereby dampen demand. "Stresses in the bank and NBFC sector have adversely affected the availability of credit in the economy," Gopinath said. "Consumption and investment have also been weighed down by weaknesses in specific sectors such as automobiles and real estate. Business sentiment has declined sharply.”