International Monetary Fund said on Wednesday India would need to accelerate economic reforms to achieve its 'potential' growth rate even as it expressed concern over high inflation.
In a statement issued after its Article IV Consultation with India, the IMF said that Reserve Bank of India should be ready to increase rates to check any further rise in inflation.
The statement comes a day after RBI reduced interest rates by 0.50 per cent to arrest declining growth.
"A major challenge will be to bring growth back to potential and ensure its inclusiveness, while further lowering inflation. . . . This will require a reinvigoration of structural reforms and fiscal consolidation," IMF said after its annual discussion with the Indian government termed as Article IV Consultation.
Indian economy was growing at over 9 per cent before the global financial crisis in 2008 pulled it down to 6.7 per cent in 2008-09.
The growth rate in 2011-12 touched a 3-year low of 6.9 per cent on account of factors like high commodity prices, slowdown in domestic demand and RBI's tight money policy.
"Growth risks are to the downside.
"The main domestic risk is a further weakening of private investment if government approvals do not accelerate, reform efforts are not reinvigorated, and inflation remains high and volatile," the IMF said.
In its World Economic Outlook released on Tuesday, the IMF has projected a moderation in the gross domestic product growth of the world economy and said that Indian economy will grow by 6.9 per cent in the calendar year 2012.
"Fiscal consolidation is crucial to crowd in private investment and lower inflationary expectations, IMF said, adding there was need to increase infrastructure and social sector spending.
The IMF also called for rationalisation of fuel and fertiliser subsidy and encouraging tax reform, especially the introduction of the goods and services tax which is hanging fire.
Indian government has not been able to push through long pending reforms in insurance, pension, banking and retail sector because of political reasons.
"Financial sector development and reforms are needed to improve access to credit and diversify funding sources.
Addressing skill mismatches, increasing labour market flexibility and improving agricultural productivity are crucial to support formal job creation and reduce poverty," IMF said.
It said that India's financial system is stable and encourages close monitoring of asset quality and provisioning.
Image: The International Monetary Fund. | Photograph: Bogdan Cristel/Reuters
