IMF Sees Rising Risks For India, Calls For Structural Reforms To Strengthen Long-Term Growth

The International Monetary Fund on Thursday warned of rising risks to India’s economic outlook due to geopolitical tensions, inflation volatility, and weak private consumption. It called for deeper structural reforms, including fiscal consolidation, labour market improvements, and trade policy adjustments, to strengthen long-term growth and economic stability.

The International Monetary Fund’s Executive Board which concluded its 2024 Article IV consultation with India, retained its growth projections of 6.5% in the current and the next fiscal, each, supported by private consumption and macroeconomic stability. India’s GDP grew 6% year-on-year in the first half of the fiscal 2024-25.

The economic outlook faces downside risks, the IMF noted, adding that geoeconomic fragmentation could affect external demand, and regional conflicts may lead to oil price volatility, weighing on fiscal stability.

“Domestically, the recovery in private consumption and investment may be weaker than expected if real incomes do not recover sufficiently,” the IMF said in a statement, adding, “Deeper implementation of structural reforms could boost private investment and employment, raising potential growth.”

Weather shocks may disrupt agricultural output, push food prices higher, and slow rural consumption recovery, the IMF noted. It further said that the financial sector vulnerabilities from interconnected nonbank financial institutions, banks and concentrated exposures in the power and infrastructure sectors.

The IMF commended India’s commitment to fiscal prudence, highlighting the adoption of a debt target as a key step in improving transparency and accountability. It recommended continued, well-calibrated fiscal consolidation to rebuild buffers, ease debt service, and reduce debt while ensuring sufficient spending on infrastructure and social needs.

Despite fiscal disparities across states, the IMF suggested a more holistic fiscal framework that includes both state and central government finances. It also called for better targeting of subsidies and improved revenue mobilisation to create space for higher spending on healthcare and infrastructure.

Commenting on the inflation, the IMF said that it has declined within the tolerance band, though food price fluctuations have caused volatility. The financial sector remains resilient, with non-performing loans at multi-year lows. The current account deficit has stayed contained, aided by strong service exports.

The Reserve Bank of India’s monetary policy remains 'well-calibrated,' the IMF said, with inflation staying within target. It noted potential opportunities for gradual policy rate cuts while stressing that monetary policy should remain data-dependent and well communicated.

The IMF recommended greater exchange rate flexibility to absorb external shocks, with forex interventions limited to disorderly market conditions. Some directors saw a case for interventions beyond this, citing limitations in the global financial safety net.

The IMF stressed the need for comprehensive structural reforms to create jobs, increase private investment and sustain long-term growth. It urged reforms in labour markets, governance, and trade policies, including further tariff and non-tariff reductions. It welcomed India’s recent tariff cuts, saying they could enhance competitiveness and strengthen its position in global value chains.

The IMF noted India’s progress in reducing emissions and expanding renewable energy. It said a balanced climate policy framework, along with greater access to concessional financing and technology, would be key to achieving net zero emissions by 2070.

It also welcomed ongoing efforts to improve the quality, availability, and timeliness of India’s macroeconomic and financial data.