WASHINGTON: Retaining its 7.5 per cent GDP expansion forecast for India in 2016 and 2017, IMF today asked the government to cut down subsidies, initiate labour reforms and dismantle infrastructure bottlenecks to sustain strong growth.
In its World Economic Outlook, the International Monetary Fund (IMF) said India should continue fiscal consolidation, underpinned by revenue reforms and further reduction in subsidies.
"Sustaining strong growth over the medium term will require labour market reforms and dismantling of infrastructure bottlenecks, especially in the power sector," it said.
In 2015, India's growth was 7.3 per cent, which would increase to 7.5 per cent in the next two years of 2016 and 2017, IMF had earlier forecast.
Retaining its last forecast, IMF said, "With the revival of sentiment and pick-up in industrial activity, a recovery of private investment is expected to further strengthen growth."
"In India, growth is projected to notch up to 7.5 per cent in 2016-17, as forecast in October. Growth will continue to be driven by private consumption, which has benefited from lower energy prices and higher real incomes," it said.
IMF pointed to lower commodity prices, a range of supply side measures and a relatively tight monetary stance resulting in a faster-than-expected fall in inflation in India, making room for nominal interest rate cuts.
"But upside risks to inflation could necessitate a tightening of the monetary policy," it warned.
However, monetary conditions remain consistent with achieving the inflation target of 5 per cent in the first half of 2017, although an unfavourable monsoon and an expected public sector wage increase pose upside risks, it said.
IMF cut its 2016 global growth forecast for the fourth time in the past year to 3.2 per cent, citing China's slowdown, persistently low oil prices and chronic weakness in advanced economies. This was down from 3.4 per cent projected in January.
It said a prolonged period of slow growth has left the global economy more exposed to negative shocks and raised the risk that the world will slide into stagnation.
IMF, however, upgraded its China growth forecast by 0.2 percentage point for this year and the next to 6.5 per cent and 6.2 per cent, respectively.
China clocked 6.9 per cent growth in 2015 when India had recorded 7.3 per cent expansion.
"China, now the world's largest economy on a purchasing power parity basis, is navigating a momentous but complex transition towards more sustainable growth based on consumption and services," it said.
"Ultimately, that process will benefit both China and the world. Given China's important role in global trade, however, bumps along the way could have substantial spillover effect, especially on emerging market and developing economies."
While China, the world's largest coal consumer, is shifting towards renewable energy resources, demand from other developing countries, especially India, is expected to increase, especially if coal prices stay low, IMF said.
"In fact, global carbon intensity per unit of energy has increased since the beginning of the 1990s owing to the rising consumption of coal, especially in Asia," the multi-lateral agency added.
In spite of the increased use of renewables and the decreased use of oil as fuel, total greenhouse gas emission has increased because of rise in demand for coal. "This increase has resulted from higher growth in emerging market economies, where coal intensity has risen," it stated further.
According to the report, the rebalancing process in China may be less smooth than assumed in the baseline scenario.
"A sharper slowdown in China than currently projected could have strong international spillovers through trade, commodity prices and confidence, and lead to a more generalised slowdown in the global economy, especially if it further curtailed expectations of future income," it said.