COMMENTARY
INTERVIEW
SPECIALS
CHAT
ARCHIVES

IMF warns India on risks of incomplete reforms

The International Monetary Fund has warned against the consequences of India's ''incomplete reforms,'' blaming them for the country's export slowdown, relatively slow pace of new investment in infrastructure, and other economic ills.

A report, released in Washington DC on Wednesday night by the IMF, after the consultations its executive board had with the Gujral government on July 2, said that the ''partial nature of reforms'' had also contributed to infrastructure bottlenecks and continuing constraints in the financial sector.

In view of uncertainties associated with the short-term outlook, IMF executive directors stressed the need to monitor developments carefully and to tighten the policy stance promptly, should inflationary pressures intensify.

Some directors cautioned against stimulative macroeconomic policies in the face of the moderate growth slowdown.

They, however, noted that India's overall economic performance had remained ''broadly favourable,'' despite a recent slowdown in industrial production and exports.

The continuation of strong economic growth without major signs of an acceleration in inflation and with a strengthened external position was welcome evidence of continuing robust supply response to the structural reforms initiated in the early 1990s, the report observed.

The IMF wanted India to make a decisive progress toward fiscal consolidation and push forward with the still long remaining agenda for structural reforms to sustain high growth, reduce poverty, and realise its economic potential.

Discussing the agenda for reforms, the directors stressed the importance of further trade liberalisation -- including further tariff cuts and a more rapid elimination of remaining quantitative restrictions on consumer goods -- and a more comprehensive easing of small-scale sector reservations.

A few directors expressed disappointment that an agreement was not reached with the World Trade Organisation committee on balance of payments restrictions on the phasing out of quantitative restrictions.

Some directors called for easing restrictions on the operations of foreign banks in India.

Another key priority for structural reform should be to establish more effective exit policies in order to facilitate the redeployment of resources across sectors, the report added.

The directors noted that the large public sector deficit was a drag on economic performance. The fiscal deficit not only reduced national savings and crowded out investment, but also placed an excessive burden on monetary policy in maintaining marcoeconomic stability.

They expressed concern that even modest deficit reduction targeted in the 1997-98 central government budget might not be achieved.

Since there was a ''significant risk'' that revenues would not respond to recent bold tax cuts as buoyantly as anticipated by the authorities, the directors wanted the government to be ready to implement contingency measures.

They also underlined the need to accelerate the disinvestment programme, the urgency of implementing a substantial increase in petroleum prices, and the need to phase out fertiliser subsidies.

Beyond the present fiscal year, the directors welcomed the authorities' target of lowering the central government deficit to 3 per cent of GDP by the turn of century, but emphasised that there was a need for more ambitious efforts to reduce the overall public sector deficit decisively from its present level of about 9 per cent of GDP.

The IMF document said that at the central government level, the recent tax rate cuts needed to be complemented with measures to expand the base, reduce tax exemptions, and improve tax administration.

It would also be important to reduce civil service employment besides cutting and improving target subsidies, it added.

Many directors called for improvements in the composition of expenditure to reorient spending from unproductive spending, such as subsidies toward infrastructure and social spending on health education.

While a point was made that the authorities had reduced defence spending as proportion of the GDP, a few speakers referred to the need to reorient such spending toward infrastructure and the social sector.

Welcoming the authorities' approach of promoting public discussion on the issues of subsidies through the issuance of a 'white paper,' it said more vigorous efforts were needed to improve public enterprise performance, including full utilisation of many of those companies.

The directors also called for adjustment at the state level to lower deficits and to improve the composition of state spending.

While surging private capital inflows signalled confidence in the Indian economy, the directors warned that such inflows could lead to an unintended loosening of monetary policy unless the exchange rate was managed flexibly.

The directors called for a cautious stance on monetary policy. Noting the present high level of liquidity in the banking system, they cautioned particularly against the possibility of rapid rates of credit creation.

They stressed that the authorities should not resist increases in interest rates -- particularly at the short end -- in the event of a pick up in credit demand.

UNI