Observing that a continued coordinated policy response to fight COVID-19 including through vaccines is critical to overcome the ongoing health crisis, a top IMF official has said that addressing the long-standing reform priorities and improving education outcomes will be key to help minimise adverse medium-term impacts from the pandemic and further boost long-term growth in India.
Alfred Schipke, Director, IMF-STI Regional Training Institute and former IMF India Mission Chief, said that the International Monetary Fund welcomes India’s ongoing commitment to providing COVID-19 vaccines to vulnerable and low-income countries.
“It will be critical to continue a coordinated policy response to fight the virus and a vaccination campaign that ensures the government’s target of vaccinating the entire adult population by year’s end,” Schipke told PTI in an interview.
“Providing fiscal resources to the health sector and social support to the most vulnerable also remain policy priorities,” he said as the IMF released its annual report on India.
Responding to questions on the ‘India 2021 Staff Report’, the IMF official said while fiscal space has narrowed, fiscal policy can and should continue to play a key role in facilitating a strong, inclusive and green economic recovery, and help avoid an adverse, longer lasting impact.
Additional fiscal support is warranted until the recovery is fully entrenched, including additional spending on health and to support the most vulnerable groups.
Here, policy space can be enhanced through a credible and clearly communicated medium-term fiscal consolidation strategy that outlines a gradual removal of policy support and revenue enhancing measures, Schipke said.
“While closely monitoring elevated inflation pressures, maintaining accommodative monetary policy remains appropriate until growth begins to firmly recover. Financial sector and regulatory policies should support the recovery while allowing the exit of non-viable firms and encouraging banks to continue building capital buffers and recognise problem loans,” he said.
Exchange rate flexibility should act as the main shock absorber with intervention limited to addressing disorderly market conditions.
“Steadfast implementation of announced structural reforms and further efforts to broaden them are needed. Reduction in tariffs, especially on intermediate goods, and further investment liberalisation can foster India’s integration into global value chains and maximise its growth potential.
“Broad-based, tailored and sustained support for students will be important to minimise adverse labour market implications and improve education outcomes,” he said.
While the 2021 quarter two Gross Domestic Product (GDP) outturn reflected the negative impact of the second wave, recent high frequency economic indicators such as Purchasing Managers’ Index and mobility have continued to gain strength, suggesting a further recovery in economic activity going forward, Schipke said.
India’s growth is projected at 9.5 per cent in Fiscal Year (FY) 2021/22 and 8.5 per cent in FY 2022/23, reflecting base effects and strong global growth, he noted, referring to the latest IMF projections.
The recovery in consumption and investment is expected to be gradual given concerns still about the path of the pandemic and the need to strengthen the financial sector. Uncertainty about the economic outlook remains elevated, with pandemic-related uncertainties contributing to both downside and upside risks, he said.
Schipke said that several challenges and risk factors could affect India’s recovery and economic outlook.
Domestically, the main downside risk is potential future waves. A protracted slowdown in turn could significantly exacerbate pre-pandemic corporate and financial sector vulnerabilities, with implications for the economic outlook and fiscal sustainability, he said.
In the absence of a credible medium-term plan, a weaker fiscal position increases the risks stemming from higher financing costs and the realisation of contingent liabilities, he said.
“Externally, a reassessment of global market fundamentals could trigger a widespread global risk-off event and capital outflows from emerging markets. “Furthermore, domestic and external supply side disruptions could pose risks to a robust recovery,” said the IMF official.
The Indian authorities, he said, have used multiple policy levers to respond to the pandemic with fiscal policy, including scaled-up support to vulnerable groups, monetary policy easing and liquidity provision, and accommodative financial sector and regulatory policies.
“Also noteworthy, India stands out positively among other countries in its continued push to advance structural reforms, despite the pandemic,” he added.