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IMF paints a pessimistic outlook for India

G. Srinivasan

NEW DELHI, Aug. 15

THE International Monetary Fund (IMF) says the near-term outlook for the Indian economy is ``somewhat less favourable'' in the face of continued signs that ``domestic structural constraints and the fiscal situation were adversely affecting investment and the economy's underlying potential.''

Releasing in Washington on Wednesday the concerns and contents of the Fund's Article IV consultation with India, the Board of Directors concurred that reversing the recent decline in growth and sustaining rapid progress toward poverty alleviation as well as maintaining the momentum and support for reform would require ``determined implementation of the authorities' policy agenda.''

In particular, ambitious fiscal consolidation and broad-based structural reforms were needed to allow resources to be redirected from servicing public debt towards development and social programmes and to provide room for fillip for private investment.

India's overall public sector deficit and debt seemed likely to remain high in 2001-02. While the Union Budget contained ``impressive commitments'' to reform, the slowdown in economic activity, revenue shortfalls in recent months and expenditure pressure s, including those related to bank restructuring and civil service reform, posed significant challenges in meeting the target.

The current year's Central Government fiscal deficit would remain roughly unchanged at about five and a quarter per cent of GDP, once disinvestment receipts were excluded from revenues. The States' fiscal situation also remained ``worrisome'' in the face of reconstruction costs in quake-hit Gujarat and difficulties in the power sector.

``The critical priority in the period ahead remained to place the fiscal position on a sustainable path,'' the report said, adding that fiscal discipline and transparency would be essential for year-to-year adherence to the Fiscal Responsibility and Budg et Management Bill's fiscal targets.

The report called for prompt passage and strict implementation of this Bill, following enactment into law. ``Similar adjustment at the State level would go a long way to reduce the overall public sector deficit ratio and place the debt ratio on a firm do wnward path.''

It would also be crucial to ensure that the legislation's longer-term fiscal targets, flexibility provisions and enforcement mechanisms were specified in a manner that ensured the legislation's credibility and durability, the report said.

While hailing the steps initiated in 2001-02 Budget towards expenditure rationalisation, the Fund stressed that a notable increase in the revenue ratio would be essential to successful fiscal consolidation. Emphasis should be placed on eliminating exempt ions on income and excise taxes. Some Directors pointed to the importance of bringing the agricultural sector more fully under the tax net.

India's financial market confidence remained ``fragile,'' though the stock market had recovered from the sharp losses suffered in early 2000. The Fund suggested that recent developments had illustrated the importance of ``determined and consistent progre ss'' in the area of financial sector reform.

As an efficient financial system was also essential to support India's broader development needs, the Fund strongly recommended a greater role for the private sector in the banking sector, further strengthening mechanisms to deal with non-performing loan s (NPAs) and follow-up measures on the recommendations of the Financial System Stability Assessment.

While the rupee appeared broadly in line with present macroeconomic fundamentals, in the period ahead, the exchange rate might need to adjust to the effects of capital account and trade liberalisation, domestic deregulation, fiscal consolidation and a mo re difficult external milieu.

Noting the authorities' policy of intervention to counter disorderly exchange market conditions, the Fund cautioned against the frequent use of administrative measures to stabilise the rate and emphasised the importance of measures to further deepen the foreign exchange market.

On monetary policy, the recent easing of RBI was appropriate, though the Fund warned that the large public sector borrowing needs narrowed the scope for reducing interest rates without compromising the credibility of the authorities' commitment to price stability.

Turning to structural issues, the Fund said measures to improve growth and productivity in the industrial sector should be put in place including reform of bankruptcy legislation, reform of policies governing the small-scale sector, privatisation of gove rnment enterprises and liberalisation of labour laws in order to improve competitiveness.

Additional measures to attract FDI would help increase growth, including continued efforts to streamline administrative procedures and regulations. In the farm sector, measures to ease restrictions on the trade and movement of agricultural commodities, s harply reduce the role of government procurement agencies and improve cost recovery were suggested.