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IMF sees Indian economy as an elephant that is starting to run

The International Monetary Fund (IMF) believes the $2.6 trillion Indian economy is an elephant that is starting to run.

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IMF sees Indian economy as an elephant that is starting to run

It was in 1991, when India waved goodbye to the Licence Raj and embraced economic liberalisation, that it was first likened to the elephant - slow, ponderous but powerful and impossible to ignore. Now, 27 years later, the International Monetary Fund (IMF) believes the $2.6 trillion economy is an elephant that is starting to run.

What's more, its latest report on India not only reaffirms that the country is "again one of the world's fastest-growing economies" - accounting for about 15 percent of global growth - but also that India it could be what China previously was for the world economy.

"Real GDP growth is estimated to have bottomed out after the dual shocks of demonetisation and disruptions from GST implementation. Growth was 6.7 per cent in 2017/18 and is projected to increase to 7.3 per cent in 2018/19," said the IMF in its 2018 assessment of the Indian economy, released today. The IMF holds bilateral discussions with members, usually every year, and puts out a staff report in the end.  

"The prolonged slowdown in global growth, subdued investments and stressed balance sheets of the banking and corporate sectors have impacted India's efforts to achieve its growth potential. Despite these challenges, growth has accelerated," read a statement by Subir Gokarn, India's Executive Director to the IMF, and Himanshu Joshi, his Senior Advisor.

The report's favourable medium-term outlook reflects continued robustness in private consumption and a recovery in investment, which is supplemented by progress in bank balance-sheet repair and improved credit growth. Better still, it sees economic risks to the outlook as "tilted to the downside" - be it external risks such as higher global oil prices or domestic financial vulnerabilities.

According to Ranil Salgado, IMF's mission chief for India, the organisation views India as a "long run source of global growth". After all, it is a key driver of global economic growth, next only to China and the US.

"India has three decades before it hits the point where the working age population starts to decline. So that's a long time. This is India's window of opportunity in Asia... Only a few other Asian countries have this," Salgado told PTI. "For the [next] three decades, it [India] is a source of growth for the global economy and could be even longer. But three decades where India can be almost what China was for the world economy for a while."

According to the IMF, India is gaining momentum on the back of good macroeconomic policies, stability-oriented policies as well as some important reforms unleashed in recent years. For instance, despite the sundry teething issues with the GST, the Salgado views the new tax regime as a long-term major gain for India. "It's something that's difficult to do. Other countries have struggled. In India it's much more complex because you have 29 states and union territories and you need agreement. I think that that was a great achievement," he said.

Highlighting the Insolvency and Bankruptcy Code (IBC) as another big achievement, Salgado said that it is already shifting the power balance between debtors and creditors and improving corporate repayment discipline. "If you think of the IBC, it's a difficult change. Basically, the underlying system to resolve bad assets from the corporate sector side is something new. It takes time and experience has to be gained. And we're seeing some of the hitches along the way there, but generally things seem to be moving in the right direction," the senior IMF official added.

According to him, India's third big achievement "is the inflation-targeting framework that you now have in the Reserve Bank of India", formally adopted in 2016 but even earlier informally.

Then there are several key smaller steps that the government is taking, like attempts to improve the business climate, steps to further liberalise FDI, et al. "Overall, we're seeing efforts to improve the balance sheet of banks as well as corporate sector. In our view, these are all important things that need to continue," he said.

The report added that a further deepening and broadening of structural reforms - like simplifying and streamlining the GST - is needed to raise investment, job growth, and productivity over the medium term, to help India's catch up with advanced economies. The IMF also identifies labour reforms and enhancing infrastructure as key areas for continued reforms.

"Another key area of reform is to strengthen governance in public sector banks to complement the reforms in the financial sector already underway. This is needed, for example, to improve incentives to enhance the efficiency of bank operations and foster more disciplined lending practices by banks," said Salgado, adding, "A first step would be to strengthen the quality and independence of these banks' boards, and privatization could also eventually be considered."

All in all, Salgado believes that things are relatively positive for us. "India has a young population. It has the potential for a demographic dividend of the next three decades," he said, but quickly cautioned that the benefits of demographic dividend are not automatically realised.

"It takes good policies to create jobs, to create even stronger economic growth. Seven to eight per cent growth is very good. It's one of the best in the world. But for India, which is appropriately aspiring to quickly catch up with the richer advanced countries, you need even stronger growth," he explained, adding that India ought to aspire to double-digit growth like China used to post. "Because if that doesn't occur, there is the risk that India could grow old before it becomes rich," he warned.

With PTI inputs

Edited By Sushmita Choudhury Agarwal

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