The International Monetary Fund has asked India to speed up reforms, including removal of trade barriers, liberalisation of FDI regime and easing of labour laws, to attain over 6-6.5 per cent GDP growth.
"The acceleration of structural reforms is key to raising growth and employment. Medium term outlook hinges crucially on the ability of government to implement the agenda of maroeconomic policy and reforms," the IMF said in a 61-page country report released on Tuesday.
The resilience of the Indian economy in the face of high world oil prices and a weak monsoon is testimony to benefits of the reforms undertaken since the early 1990s.
"India recorded growth above 8 per cent last year, one of the fastest in the world, and growth remains robust this year," it said.
In the base-line scenario, the IMF said: "Growth of 6-6.5 per cent would be achieved -- somewhat above last decade's average, as economic reforms continue and the nascent recovery in investment takes hold."
Asserting that trade could be 'powerful engine of growth' for Asia's fourth largest economy, the IMF said: "India's trade regime remains restrictive. Trade liberalisation should also be accelerated by lowering tariffs, introducing a more uniform duty structure and eliminating administrative barriers."
While the potential to make India a better place to do business was enormous, "what is holding it up is lack of infrastructure, regulatory burden, lack of labour market flexibility, need to improve bankruptcy and loan recovery frameworks, tax reform and eliminating protections and investment ceilings on small industry," the IMF said.
The IMF expressed doubts over India's attempts to reduce fiscal deficit of both the Centre and states in absence of fiscal adjustment carried by the states.
The Debt-GDP ratio could remain high at about 82 per cent by 2009-10 and the combined deficit of the Centre and states would remain high at 7 per cent of GDP, it said.
Looking beyond 2004-04, the IMF said: "There was agreement that the bulk of the fiscal adjustment should be achieved through a front-loaded tax reform. The Kelkar report provides a roadmap."
The IMF also said that agriculture reforms was crucial for India's economic growth and poverty reduction.
On the external sector, the IMF said: "The continued strength in the balance of payments is a good opportunity to liberalise further external transactions."
It said considerable progress has been made in strengthening financial sector performance but challenges remain. "Much remains to be done to build a strong, well-supervised and globally competitive financial system in India."
Cooperative banks have come under increased pressure, raising concerns about their governance and oversight, it said. Also, the authorities' strategies for the future of DFIs needs to be clarified.
To avoid the build-up of contingent claims on government resources, the IMF said the new institutions should be allowed to base their investment decisions on commercial principles.
"More generally, further liberalisation and opening up to private and foreign investors would be desirable, together with commensurate strengthening of risk-based supervision," it said referring to hike in FDI in private banks.
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