India to remain source of global growth: IMF
dubai — India will remain a source of growth for the global economy for the next few decades and it could be what China was for the world economy, the International Monetary Fund (IMF) said on Wednesday.
India now contributes, in purchasing power parity measures, 15 per cent of the growth in the global economy, which is substantial and next to only China and the US, the IMF said.
Describing India as an elephant starting to run, Ranil Salgado, the IMF’s mission chief for India, said India is right on track to sustain its position as one of the world’s fastest-growing economies as reforms start to pay off.
The IMF expects India’s $2.6 trillion economy — Asia’s thirdlargest — to grow by 7.3 per cent for fiscal year 2018-19 — meaning the year that runs from April of 2018 through March 2019 — from 6.7 per cent in the year prior. It also forecast India’s economy could grow at 7.5 per cent in 2019-20. Salgado said in order to sustain rapid growth and raise incomes for the country’s 1.3 billion people, India will need to build on the success of its reforms.
“India has three decades before it hits the point where the working-age population starts to decline. So that’s a long time. This is India’s window of opportunity in Asia. It’s somewhat only a few other Asian countries have this,” he said.
“India’s economy is gaining momentum, thanks to the implementation of several recent noteworthy policies — such as the enactment of the long-awaited Goods and Services Tax, and the country opening up more to foreign investors,” said Salgado.
The IMF official said to sustain and build on these policies and to harness the demographic dividend associated with a growing working-age population (which constitutes about two-thirds of the total population), India needs to reinvigorate reform efforts to keep the growth and jobs engine running. “This is critical in a country where per capita income is about $2,000, still well below that of other large emerging economies.”
The IMF said in its annual assessment of the Indian economy that the country was facing a “broadly positive outlook” thanks to “strengthening investment and robust private consumption” but warned of risks from higher fuel prices and a weakening rupee.
Growth expanded to 7.7 per cent for the quarter from January to March, the highest for seven quarters, as the economy started to recover from a rocky start to Prime Minister Narendra Modi’ economic initiatives.
The IMF commended Modi’s government for introducing a nationwide Goods and Services Tax (GST) in 2017.
“GST has a complex structure with a relatively high number of rates [and exemptions], which could be simplified,” it said.
India’s quarterly growth fell as low as 5.7 per cent in mid-2017 as the economy readied for GST and reeled from a shock cash ban in late-2016.
The decision to scrap 86 per cent of currency notes, known as “demonetisation”, in November 2016 dealt a major blow to the economy. The IMF noted that the move had caused “an acute monetary shock” but said the economy has since recovered.
Salgado said India recently implemented a new insolvency and bankruptcy code, which should make it easier for creditors to seek repayment from debtors who are in arrears. “The bankruptcy code is already shifting the power balance between debtors and creditors and improving corporate repayment discipline. In addition to the bankruptcy code, the central bank and government have taken steps to improve banks’ recognition of bad assets and to recapitalize public sector banks. Ultimately, these efforts will help to solidify bank balance sheets and support the flow of credit to the rapidly expanding economy.”
The IMF pointed out that another key area of reform is to strengthen governance in public sector banks to complement the reforms in the financial sector already underway.
Salgado said India can benefit from improving its integration with global markets. The country has made a lot of progress, in that most foreign investments are now allowed to enter sectors of the Indian economy under what is known as “the automatic route.” This amounts to a meaningful reduction in bureaucratic oversight, and greatly increases access to the Indian market for foreign investors.
However, more can be done to sustain the recent foreign direct investment inflows and remove trade barriers — which remain significant in the country.
The Washington-based Fund praised the government for taking measures to tackle crippling debts at India’s public-sector banks and for relaxing rules on foreign direct investment, but said more reforms were still needed.
“India would benefit from further liberalisation of trade and foreign investment,” the IMF said. The IMF also stressed the importance of modernising labour laws and regulations and other measures to help increase formal employment, particularly the employment of women.
Inflation is on the rise due to high oil prices and a falling rupee. The country, which is expected to hold a general election in spring 2019, imports nearly 80 per cent of its oil and fluctuations in crude oil prices can seriously affect the economy.