IMF says demonetisation, GST work in progress; low growth an aberration

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Published: December 22, 2017 1:30:09 PM

International Monetary Fund (IMF) today said that both the economic reforms will reap rich dividends in future even though a short-term pain may exist.

 IMF, India growth rate, International Monetary Fund, Moody's, S&P Global RatingThe International Monetary Fund (IMF) today said it will update its growth rate forecast for India in January next year. (Reuters)

Rejecting that both demonetisation and goods and services tax (GST) have permanently slowed down the Indian economy, International Monetary Fund (IMF) said that both the economic reforms will reap rich dividends in future even though a short-term pain may exist. In an interview with CNBC-TV18, an IMF official said, “Demonetisation & GST brought short-term pain but long-term benefits and expect growth in India to be 6.7% this year & 7.4% next year.” On being asked about the growth slowdown in India, IMF responded saying, “India not growing as fast as the rest of world is an aberration.” In its Financial System Stability Assessment (FSSA) for India released today, IMF has observed that India needs to strengthen Reserve Bank’s independence so as to help it pro-actively supervise banks and deal with issues like removal of government-appointed directors on bank boards, says an IMF report. The report also suggested that loan classification and provisioning rules should be reviewed to ensure they reflect observed losses, and to reduce special loan categories. “Other priorities include introducing a risk-based solvency regime for insurers, unifying the oversight of commodities markets and addressing risks from politically exposed persons and the gold sector,” the report said.

Since the 2011 Financial Sector Assessment Program (FSAP), India has recorded strong growth in both economic activity and financial assets, supported by important structural reforms and terms of trade gains. I The FSAP took stock of the considerable progress made in strengthening financial sector oversight and identified areas where a scope for further improvement remains. “Notably, these include strengthening the RBI’s de jure independence as well as its powers over the PSBs (Public Sector Banks)…,” the multilateral institution said. The FSSA said effective supervision requires stronger de jure independence and enforcement powers as well as a proactive supervisory stance. “The current gaps in the RBI’s supervisory powers over the PSBs (i.e. the RBI cannot remove government-appointed PSB directors or management, force a merger, revoke a license, or trigger liquidation of PSBs), as well as extensive powers of the government to override RBI decisions should be addressed through legal amendments,” it said.

As per the IMF, effective use of the enhanced supervisory tools and methodologies will require continued efforts to ensure a proactive supervisory attitude and willingness to “lean against the wind”. To address conflicts of interest, the IMF further said ownership of the National Housing Bank should be transferred from the RBI to the finance ministry and supervision of housing finance companies placed under the RBI. The IMF directors underscored the importance of adequate resources, de jure independence, and a full set of supervisory powers—including over PSBs—in underpinning the RBI’s effective supervision and regulation of financial institutions. “There is also a need to introduce risk-based solvency and supervision of insurers and to continue moving toward a market-based environment for the sector,” the IMF said. Unifying the oversight of all commodities markets would promote more efficient market functioning, in line with the authorities’ intention to modernise the sector, it added.

With PTI inputs

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