India’s Growth Slowdown Calls for Reinvigorated Reforms

Real GDP growth expected to slow to around 7 percent from above 8 percent

Private investment key to realizing Indian potential

Structural reforms are critical to boost growth, say IMF economists

In their annual assessment of the Indian economy—known as the Article IV consultation—IMF economists say the South Asian country is confronting a slowdown in investment, which threatens its aim of achieving inclusive growth, or growth which benefits the poor.

The IMF expects real GDP to grow 6¾ percent in 2011/12, rising to 7 percent in 2012/13.

“While this is still a very respectable achievement, India has an even greater potential to raise the economic well-being of its population, including that of the poor,” said the IMF’s mission chief for India, Masahiko Takeda.

Toward higher, sustainable, inclusive growth

In its report, the IMF analyzed the causes of the recent growth and investment slowdown, and concluded that while cyclical factors, such as the rise in global uncertainty, high and volatile inflation, and monetary policy tightening, have had an impact, structural shortcomings have also been an important contributor.

These include infrastructure bottlenecks (power supply, road and rail transportation) and the relatively high costs of doing business.

“Private investment is critical to create jobs and reduce India’s poverty, so reducing impediments to its revival is essential,” said Takeda.

The report noted that India’s inflation remains elevated, which constrains the central bank’s ability to ease monetary policy. India’s fiscal deficit and public debt are also relatively high, so it lacks the means for a fiscal boost to revive growth. Consequently policymakers need to rely on structural reforms to go back to a higher growth path, say IMF economists.

Structural reform agenda

They suggest a wide range of reforms including simplifying permitting procedures, making contracts more enforceable, and facilitating land acquisition and making it more predictable.

The economists stressed the need to speed up reforms in the power sector, particularly through better allocation of domestic coal, by bringing state electricity boards’ finances onto a sustainable footing, and reforming coal pricing and electricity tariffs.

“Reforms of the financial sector, labor market, agriculture, and human capital development through education and training also contribute to India’s growth potential” notes the report.

Tackling inflation

The IMF report also...