IMF Says India Needs Labor & Bank Reforms For GDP Surge

The International Monetary Fund (IMF) said that India should address the harshness of the labor market to create more jobs and also undertake financial sector transformation to improve the governance in the public sector banks to contain the downside exposure to medium-term growth prospects.

The IMF has kept the GDP growth forecast for India unchanged at 7.4% for the year 2018-2019 and at 7.9% for 2018-2019, in its biannual World Economic Outlook. It expects that the economic activity will be raised by the strong private consumption as well as paling effect of demonetization of high-value currencies and implementation of the National Goods and Services Tax (GST).

"Over the medium term, growth is expected to gradually rise with continued implementation of structural reforms that raise productivity and incentivize private investment," it added.

The global success is projected to take up and reach 3.9% this year and next, it will be supported by strong momentum, favorable market sentiment, accommodative financial conditions.

"The main priorities for lifting constraints on job creation and ensuring that the demographic dividend is not wasted are to ease labor market rigidities, reduce infrastructure bottlenecks, and improve educational outcomes," it said.

"The corporate debt overhang and associated banking sector credit quality concerns exert a drag on investment in India. The recapitalization plan for major public sector banks announced in 2017 will help replenish capital buffers and improve the banking sector's ability to support growth. However, recapitalization should be part of a broader package of financial reforms to improve the governance of public sector banks, and banks' debt recovery mechanisms should be further enhanced," it said.

In an unanticipated change in its stand, the IMF said advancement to monetary policy frameworks appear to have lowered inflation expectations in India. "These developments have created room for monetary policy to support activity should downside risks to growth materialize," it said, at a time most analysts believe a long hiatus from the Reserve Bank of India on policy rates.