By Anjan Roy
International Monetary Fund’s latest country level consultations with India reveal a flattering picture of the state of the economy. The executive directors have submitted their consultation report to the government, along with their recommendations for the government and its economic managers. Two observations stand out from the IMF’s review and recommendations which deserve careful consideration.
First, IMF has noted the government’s plan for fiscal condition, but underlined the importance of expenditure monitor and review. Secondly, while noting that the Indian financial sector is robust and generally stable, there is one area of vulnerability, that is, the critical weaknesses of the large and expanding non-banking financial sector.
IMF report points out: “Directors highlighted that India’s financial system has been sound, supported by strong capital and liquidity positions.” However, the IMF economists urged “the authorities to mitigate vulnerabilities among nonbank financial institutions and cautiously monitor risks from concentration and rising financial sector interconnectedness.”
Some of the recent incidents of connected non-banking financial institutions underline the regency of addressing the issue. A sound piece of advice seems to be its words of caution on expenditure of the government. Expenditure control and monitoring of the quality and returns from public expenditure is a critical aspect of management of government finances.
While commending the government’s plans for fiscal consolidation, the IMF directors have suggested “achievement of the fiscal deficit target will require strong spending discipline.” This is a universal truth. A rupee in an individual’s pocket is much more productive and is spent far more cautiously than in the coffers of the government.
As usual, they have harped on further “structural reforms” as a requite policy initiative for continued robust growth and achieving the country’s objective of achieving a developed economy status by 2047.
The Fund report states: “Looking ahead, India’s ambition to become an advanced economy can be supported by advancing comprehensive structural reforms that enable higher potential growth.”
IMF has not done much by way of spelling out a package of reform measures, apart from general observations like continuing with the objective of fiscal consolidation and watching out for the effect of lowering of GST and income tax rates on the overall level government revenues.
Reading IMF reports now a days is such a departure from its earlier stance of policy packages. IMF, for example, has underlined the greater need for social security, which used to be an anathema for it previously. It has also urged intentions in the foreign exchange markets to contain “disorderly’ conditions and speculative overhand.
There was a time when interventions in foreign exchange markets to bring about stability used to be scoffed at by IMF economists. These were after all interferences with the operations of the free markets. And after all, the foreign exchange market was the holy grail of all free markets.
Anyway, leaving aside these ideological or prescriptive areas, the overall review brings out some striking areas of strengths of the Indian economy, as the IMF executive directors have noted in their country report.
The most important and striking feature is that the IMF has seen merit in the functioning of the Indian economy which has effectively withstood the ill effects of the unprecedentedly high tariff levels of the USA. Despite the 50% tariff on exports to the United States, India has merrily continued to grow at above 6%. This is robust performance by any standards.
Growth has remained buoyant, while prices have been stable and shown some decreases. India grew by 6.5% in 2024-25, real GDP expanding by 7.8% in the first quarter of 2025-26, according to IMF country report.
Headline inflation declined sharply, driven by subdued food prices. IMF expects the inflation levels to remain stable, with this year’s favourable monsoon and falling oil prices. No doubt, price stability is a critical element of continued prosperity, particularly in a democratic set up.
Of course, the recalibration of the GST would have contributed to further keep prices under check. However, this factor will wear our next year and fresh demand push from continued rural demand could upend prices.
However, in the face of continuing geo-economic turmoil, and uncertain trade prospects, the domestic drivers of growth assume greater importance Strong domestic demand, particularly rural consumer demand, is undoubtedly playing a critical role in holding growth at a high level.
The key appears to be the resilient domestic demand, which should help overall growth rate at elevated levels. This is also the principal reason that the domestic corporate and financial sectors have remained buoyant.
To round up its assessment of the performance and prospects of the Indian economy, the IMF has flagged some obvious issues. As an “upside” factor, the Fund economists have underlined the importance of concluding trade deals fast to boost exports.
“On the downside”, IMF emphasises, “further deepening of geoeconomic fragmentation could lead to tighter financial conditions, higher input costs, and lower trade, FDI, and economic growth.” For the domestic economy, IMF has underlined the obvious: “Unpredictable weather shocks could affect crop yields, adversely impact rural consumption and reignite inflationary pressures.” (IPA Service)
