Comprehensive structural reforms are crucial for India to create high-quality jobs, invigorate investment, and unleash higher potential growth, the International Monetary Fund (IMF) said.

Efforts should focus on implementing labor market reforms, strengthening human capital, and supporting greater participation of women in the labor force, the IMF said in its Article IV consultation report.

The IMF’s Article IV consultation report is a document produced as part of regular, usually annual, assessments the global agency conducts with its member countries.

During these consultations, the IMF evaluates a country’s economic health and discusses potential improvements with government officials. Following these discussions, the IMF releases a report that outlines its findings and offers recommendations.

Maintaining macroeconomic stability

While IMF executive directors commended India’s prudent macroeconomic policies and reforms, which have contributed to making the economy resilient and once again the fastest growing major economy, they stressed that amid headwinds from geoeconomic fragmentation and slower domestic demand, continued appropriate policies remain essential to maintain macroeconomic stability.

Boosting private investment and foreign direct investment (FDI) is also vital and will require stable policy frameworks, greater ease of doing business, governance reforms, and increased trade integration, which should include both tariff and nontariff reduction measures with all parties involved.

In this context, he IMF directors welcomed India’s recent tariff reductions, noting that these can enhance competitiveness and foster India’s role in global value chains.

The directors lauded India’s significant progress in emission intensity reduction and renewable energy deployment and agreed that a balanced climate policy framework, alongside greater access to concessional financing and technology, would be key to achieving net zero emissions by 2070.

They also welcomed the ongoing capacity development provided to further upgrade the quality, availability, and timeliness of India’s macroeconomic and financial statistics.

India’s commitment to fiscal prudence

The IMF officials commended India’s commitment to fiscal prudence and welcomed the adoption of a debt target as the medium-term fiscal anchor, which has enhanced transparency and accountability.

Given significant development and social needs, they recommended continued, well-calibrated fiscal consolidation over the medium term to rebuild buffers, ease debt service, and reduce debt.

Notwithstanding fiscal disparities across states, they also broadly agreed that a more holistic fiscal framework that includes state and central government, as well as a more detailed fiscal deficit path with sufficient flexibility, could be used as an operational guide.

RBI’s calibrated monetary policy

The directors also welcomed the Reserve Bank of India’s well-calibrated monetary policy with inflation remaining within the target band. They noted that opportunities could arise to gradually lower the policy rate further, and stressed that monetary policy should remain data-dependent and well communicated.

They recommended greater exchange rate flexibility as the first line of defense in absorbing external shocks, with foreign exchange interventions limited to addressing disorderly market conditions.

A few directors also saw the need for foreign exchange interventions in other cases noting limitations in the current global financial safety net.

The directors welcomed the 2024 Financial System Stability Assessment, which points to the overall resilience of India’s financial system, and encouraged the authorities to use the current favorable environment to further strengthen financial resilience.

Noting pockets of vulnerability from the interconnectedness among nonbank financial institutions, banks, and markets, as well as from concentrated exposures to the power and infrastructure sectors, the IMF officials recommended further aligning India’s framework of financial sector regulation, supervision, resolution, and safety net with international standards.

A number of directors also suggested greater flexibility in priority sector lending, while encouraging authorities to further improve the anti-money laundering and counter-terrorist financing framework.