India must put special premium on good policy, says IMF's Bauer

New Delhi: In the face of rising external risks, the Indian government should remain prepared to take prompt action to meet emerging challenges, said Andreas Bauer, International Monetary Fund’s (IMF’s) senior resident representative for India, Nepal and Bhutan. Edited excerpts:

How prepared is India to brave the external risks such as rising oil prices, currency depreciation and an intensifying trade war?

External risks have certainly increased. India has over the last few years reduced vulnerabilities, and is in a better spot than five years ago at the time of the taper tantrum. We have a much stronger policy framework. We have greater buffer in several sectors. That said, while India is much better prepared today, some spillovers will affect the economy. Oil has a very direct impact.

We have downgraded growth projection for India a little bit to reflect that. While the financing conditions is still overall positive, markets have become tighter. Therefore, India needs to be prepared for that. At the current juncture of the external situation, India must put special premium on good policy.  

Do you believe that the government will be able to push structural reforms at this juncture when elections are round the corner?

The first order of business is that we have sound macro-policy. On the fiscal side, we have a budget where there is some consolidation this year. Our advice is to fulfil the budget commitments, which is important in the current environment. While there is always a political cycle, our message is that structural reforms are marathons rather than sprints. We should try to keep an even pace in moving forward. Even in current circumstances, you can advance in some areas, certainly continuing to address the twin balance sheet problem. Our message simply is that more the reform measures, the more certain we can be that the Indian economy will grow at a high pace over the next few years.

But the report suggests that it may be difficult for the government to achieve its fiscal deficit target in the current fiscal year.

Certainly there are risks. Therefore, the government needs to be mindful and prepared to take action if some of these risks materialize. There is certainly an ambitious revenue target on the table. There are expenditure pressures as well. What is warranted under the current circumstances is a proactive attitude to monitor budget implementation. What we have seen in the first few months is a measured pace of spending, which is welcome.

Hopefully, it continues till the end of the year, so that the government can meet the target. 

The IMF report says impact of demonetisation on growth has been more severe and long lasting than earlier anticipated. Has demonetisation permanently damaged the informal sector or its impact is behind us now?

We definitely think that the impact is behind. It probably dragged longer than we would have wanted. Overall, it is difficult to assess comprehensively the net impact of demonetisation because some of the benefits are hard to quantify and will take time to kick in. It is also hard to assess its impact on the informal economy as there is very little data for that. What is clear, however, is that its initial impact on domestic demand is behind us and that’s positive for the economy. 

IMF sees growth revival on the back of investment revival. Where do you see the money coming from, given that banks are reluctant to lend?

One of the reasons why further and quick progress in sorting out the twin balance sheet problem is needed is because we would like banks to be ready when investment demand picks up further to provide lending. But the financial sector is much larger than just the banks. The non-banking financial corporations and the capital market provide significant resources for investment. Investment, of course, can be supported by rising profits of the firms that are reinvested. So, there are a range of sources of capital that can be tapped to finance investment. 

The IMF has advocated gradual tightening of monetary policy. How many more hikes do you expect in 2018-19? 

In general, we do see upside risks to the inflation outlook. From our view, it merits the central bank to tighten monetary policy gradually. 

In the current fiscal?

Yes, certainly in the period going forward.