BackIndia needs to take more steps to contain inflation, fiscal deficit: IMF
The new govt's emphasis on continued fiscal consolidation is welcome, but the quality and durability of the consolidation remain of concern
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New Delhi: The Indian government needs to take more steps to continue reducing stubbornly high inflation and large fiscal deficit, the International Monetary Fund (IMF) said on Thursday.
“While the new government’s emphasis on continued fiscal consolidation is welcome, the quality and durability of the consolidation remain of concern. The government should articulate structural measures to underpin the consolidation path, including subsidy reform and progress on the goods and services tax," the multilateral lender said in a report released ahead of a meeting of finance ministers and central bank governors of the Group of Twenty (G-20) countries at Cairns, Australia.
While wholesale price inflation decelerated to a near five-year low of 3.7% in August, the Consumer Price Index (CPI)-based inflation slowed only marginally to 7.8% in July.
Reserve Bank of India (RBI) governor Raghuram Rajan has consistently maintained that retail inflation is too high and needs to be further brought down to allow him to cut policy rates. The central bank will review its monetary policy on 30 September.
“Inflation is high and the best solution for the country is to bring it down. Then I can cut interest rates. I have no interest to keep interest rates high for even a second longer. I want to bring down interest rates when feasible; it will be feasible when we would have won the fight against inflation," Rajan said on Monday.
IMF in its report titled “Global Prospects and Policy Challenges" said the task of lowering inflation on a sustainable basis will also require “further increases in the policy rate and a simpler monetary framework with clear objectives and operational autonomy for RBI."
IMF has been advocating to the central bank to raise policy rates further. A study authored by Rahul Anand and Volodymyr Tulin of the IMF in March said that heightened uncertainty and deteriorating business confidence, rather than an increase in interest rates, have played a key role in the recent investment slowdown in the country.
“In the short term, lowering nominal interest rates may provide some relief in terms of a reduced interest burden, especially to corporates with high leverage. However, in the medium term, lower rates with little slack in the economy would stoke inflation further and exacerbate inflation trends across sectors, hurting investment," the paper said, adding that continued progress on structural reforms and resolving supply-side bottlenecks remain critical to shore up confidence and revitalize investments and economic growth.
The Indian economy grew at 5.7% in the first quarter (April-June) of 2014-15. The finance ministry expects growth to pick up to average 5.8% in the current fiscal year. IMF has projected that the Indian economy will expand by 5.4% in 2014-15 and accelerate to a pace of 6.4% the following year.
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