The International Monetary Fund (IMF) in its latest World Economic Outlook (WEO) report has said that the Indian government must stick to its fiscal consolidation path and focus on the reforms especially in the labour and infrastructure sectors. It said that fiscal consolidation should continue, underpinned by revenue reforms and further reductions in subsidies and added that sustaining strong growth over the medium term will require labour market reforms and taking apart of infrastructure bottlenecks, especially in the power sector.
The report further stated that lower commodity prices, supply side measures, and a relatively tight monetary stance have resulted in a faster-than-expected fall in inflation, making room for nominal interest rate cuts, but upside risks to inflation could necessitate a tightening of monetary policy. The report predicted that India would achieve its inflation target of 5 per cent in the first half of 2017, but has warned that an unfavourable monsoon and the effect of public sector wage increases due to the adoption of the Seventh Pay Commission’s recommendations could pose risks. The retail inflation or the Consumer Price Index (CPI) for the month March 2016 eased to a six- month low at 4.83 percent as compared to 5.18 percent in February.
The WEO report has projected that India’s current account deficit would widen sharply to $94.7 billion by 2021. The WEO data show India’s CAD, which was at $26.2 billion or 1.3 per cent of GDP in 2015, will widen to $51.8 billion (2.1 per cent of GDP) by 2017. Furthermore, IMF has retained its GDP growth forecast for India, adding that the main driver of this growth will be private consumption and investment. The report said that “In India, growth is projected to notch up to 7.5 per cent in 2016-17, as forecast in October”.
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