Speech

Opening Remarks by Wanda Tseng, Deputy Director, Asia and Pacific Department, IMF, in a Conference Call with Journalists on the Completion of the 2005 Article IV Review of the India Economy

February 21, 2006

Thank you very much for attending this event. The IMF's annual consultation with India was concluded on February 6. The Public Information Notice, along with the staff report and a set of background papers will be available on the IMF website later this morning. This is the second-consecutive year that the full set of staff papers are available to a wide audience, and we would like to highlight the key issues in this year's discussions.

This is a time of great optimism about India, both within the country and internationally. Growth is set to exceed 7½ percent for a third consecutive year in 2005/06; we expect some moderation in this year to about 7 percent in 2006/07. And India is increasingly opening its economy and reaping the benefits of globalization. The IMF focused its discussions with India this year on how to ensure that that the growth momentum can be sustained, and even accelerated, over the longer term and how to manage short-term risks associated with the rapid growth. Let me highlight a few points:

First, while India appears poised to grow rapidly in the future, such an outcome is by no means assured. One of the critical challenges facing India is how to further develop manufacturing in order to create jobs for the more than 100 million people set to join the labor force in the next decade. To do so, India needs to enhance its integration with the global economy, by continuing to lower trade tariffs, loosen sectoral limits on foreign direct investment, improve the business climate, make more flexible its labor laws, and eliminate reservation of production to the small-scale sector. What we highlighted in this year's discussions is that moving faster on these longstanding reforms in the current environment of optimism will have large pay-offs.

Also critical to sustaining and raising growth are ongoing efforts to improve India's economic infrastructure. A number of positive steps have been taken in this regard, including the recent decision to award concessions for the modernization of Delhi and Mumbai airports. Further progress in closing India's infrastructure gap will depend on creating a regulatory environment conducive to private participation and on freeing up fiscal resources where public provision of infrastructure is needed.

Second, the upcoming 2006/07 budget presents an opportunity for the government to make a strong statement about its intentions to accelerate fiscal adjustment and to do so in a way that supports growth. Continued tax reform will be critical if the government is to achieve its deficit targets and raise spending on much-needed infrastructure and social services. The introduction of the state VAT and the broadening of the services tax base last year were important, but further tax base broadening is needed. There are several options available, such as broadening the corporate income tax base, especially by trimming existing exemptions, and reforming the personal income tax. More can also be done to promote greater spending efficiency, especially by improved targeting of subsidies to the most needy. The current positive economic environment presents an excellent opportunity to make these plans a reality.

Third, while inflation has remained contained, underlying pressures point to upside risks. Domestic demand remains strong, as evidenced by a widening trade deficit and rapid credit growth. And India still needs to pass-through more of the rise in the past year in global oil prices. In this light, monetary policy should remain focused on keeping inflation expectations in check. The Reserve Bank of India is rightly focused on monitoring inflationary pressures closely. Fiscal policy can also help counter demand pressures, pointing to the importance of presenting a prudent budget for next year.