New Delhi: The World Bank and the International Monetary Fund (IMF) emphasized the need for India to push forward the reforms agenda, including a cut in subsidies, even as they remained largely optimistic about the economic prospects of the country—and pointed out that it would do better than China.

The forecasts—both projected that the economy would expand by 7.5% this financial year—come in the background of favourable data: last week, the government announced that factory output grew 5%, the fastest in three months, and on Monday, it said consumer inflation grew at a lower-than-expected 5.17%.

They also come soon after rating company Moody’s Investors Service Inc. upgraded India’s credit outlook to positive.

Yet, it was clear that the World Bank and IMF would like New Delhi to do more.

IMF said in its bi-annual World Economic Outlook, released in Washington DC coinciding with its spring meeting, that it would like to see India remove “infrastructure bottlenecks in the power sector" and implement “reforms to education, labour, and product markets to raise competitiveness and productivity".

IMF said India’s growth at 7.5% in 2015-16 will surpass China’s decelerating growth of 6.8% in the same year. “Growth will benefit from recent policy reforms, a consequent pickup in investment and lower oil prices," the report said.

The World Bank, in its South Asia Economic Focus report, said India’s growth is expected to accelerate to 7.5% in 2015-16 and to 7.9% in 2016-17 on the back of significant acceleration of investment growth during the two-year period. “The country is attempting a shift from consumption to investment-led growth, at a time when China is undergoing the opposite transition," it added.

The World Bank said the outlook for the Indian economy is underpinned by two main trends: (i) contained crude oil prices, and (ii) a reform programme which, if fully implemented, can unlock investment and boost productivity. “Higher production capacity, commensurate with accumulating capital and increase in factor-productivity, and continued but targeted fiscal consolidation will help curb domestic and external imbalances in the face of rising domestic demand in the medium-term," it added.

Much of the pickup in output will be reflected in an expansion of the industrial sector in response to several reforms measures, which could improve the business environment and ease regulatory constraints, such as introduction of goods and services tax, single-window clearance for registration, and land acquisition reforms, the World Bank said.

Former chief economic adviser in the finance ministry and India’s representative in the IMF Arvind Virmani said the government has taken up a number of reform measures already. including the institutional changes proposed in the budget. “The process of labour reforms has started but a lot needs to be done on this front. The government also needs to focus on addressing the concerns of investors on the direct tax front," he added.

The National Democratic Alliance (NDA) government has identified labour reforms as one of the key measures to improve the ease of doing business in India. The Parliament has approved the labour laws exemption act which will allow thousands of small industries to file just one return for compliance with a dozen or more labour laws, as well as the as the apprentices act which allows more paid interns to get trained on the shop floor of the company. The factories act, which will allow doubling the provision of overtime for a worker to 100 hours in a quarter and relax norms for women to work in night shifts, is currently under discussion in the Parliament.

India completely deregulated gasoline prices in June 2010 and diesel prices in November 2014. However, household kerosene is still subsidized. Household cooking gas is largely supplied in 14.2 kg cylinders, and is sold at both subsidized and commercial rates. The subsidized prices of kerosene and cooking gas have remained unchanged since October 2012 and November 2014, respectively. But in recent months, the excise duty on diesel and gasoline has been increased periodically to match the decline in international oil prices.

On the fiscal policy front, IMF said that countries like India, Indonesia, and Malaysia should seize the opportunity provided by the current low fuel and food prices to further reform or phase out subsidies, which tend to be poorly targeted. “Doing so would improve spending efficiency and shield public spending from future oil price fluctuations," it added.

“Cheap oil gives the opportunity to rationalize energy prices, reducing the fiscal burden from subsidies and contributing to environmental sustainability," World Bank South Asia chief economist Martin Rama said.

IMF said for countries like India, addressing supply bottlenecks by expanding essential infrastructure and raising productivity would increase near-term demand and support resilience to realignments of reserve currencies.

On the external front, the World Bank said major risks stem from low growth of India’s key sources of trade, investment and remittance flows; and a possible increase in oil prices. “On the domestic front, the most significant risks to the outlook are related to the implementation of the government’s ambitious and wide-ranging reform program. Effective policy implementation on many challenging fronts will be necessary to realize the meaningful and sustainable increase in investments," it added.

Moody’s last week upgraded the country’s rating outlook, holding that the recent measures taken by the government to simplify regulatory regime and increase foreign direct investment will reduce India’s sovereign credit rating constraints. Standard and Poor’s, however, warned on Monday that India’s hard-owned fiscal improvements could fail to withstand an external shock, given less than rock-solid public finances that remain a concern for its sovereign rating profile.

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