IMF Chief Gita Gopinath: Need Structural Reforms In Indian Economy

As India struggles to revive its economy, IMF Chief Economist Gita Gopinath says that the extent of the slowdown of the Indian economy has surprised many, “including us here at the IMF.” For the July - September quarter of 2019-20, India's Gross Domestic Product (GDP) has dropped to a low of 4.5 percent, a drop that wasn't entirely unexpected.

Key Takeaways:

• Gita Gopinath was appointed as the Chief Economist by International Monetary Fund (IMF) in October 2018
• Regarding economic slowdown in India, Gopinath said that the extent of the slowdown of Indian economy has surprised many including “us here at the IMF”
• She suggested that the government should undertake structural reforms such as bank clean-up and labour reforms to address the slowdown in domestic demand.
• For the July-September quarter of 2019-20, India's Gross Domestic Product (GDP) fell to 4.5 percent, a six year-low.

Gopinath said low food prices hold back farmers’ income and thereby dampen demand. “Stresses in the bank and non-bank financial sector have adversely affected the availability of credit in the economy.”

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Structural Reforms Needed To Revive The Economy

Gopinath suggested that the government should undertake structural reforms such as bank clean-up and labour reforms to address the slowdown in domestic demand. “Given the cyclical position and the structural challenges of the Indian economy at this point, we recommend that policies focus on managing the slowdown in domestic demand, and on boosting productivity growth and supporting employment creation in the medium term,” she told PTI in an interview.

“Politically, the time - early in the government’s second term - is right for a structural reform push,” she added.

GDP For July- September At Six Years Low

The gross domestic product (GDP) for July-September 2019-20 has fallen to 4.5 percent, which is a six-year-low. Gopinath also suggested that the government should also include a credible fiscal consolidation path that is more ambitious than currently envisaged by the government. “This is needed to reduce the high level of debt and reduce crowding out which would free up financial resources for private investment. This should be driven by subsidy-spending rationalisation and tax-base enhancing measures,” she said.

“Growth slowed further to a six-year low of 4.5% (year-on-year) in the second quarter of FY2019-20 (July-September 2019), from 5% (year-on-year) in the previous quarter. A sharp moderation of investment, slowing consumption growth, and an inventory rundown contributed to the slowdown,” she said.

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Three Policy Priorities For The Government

Regarding the economic slowdown, Gopinath laid down three policy priorities for the government.

• To Accelerate The Clean-Up Of Banks

The first priority that Gopinath laid out is to accelerate the clean-up of banks, other financial institutions, and corporate balance sheets and enhance governance of public sector banks to revive bank credit and enhance the efficiency of credit provision while monitoring closely emerging risks from the liquidity stress in non-banking financial companies (NBFCs) and enhancing supervision and regulation of the NBFCs.

Regarding economic slowdown in India, Gopinath said that the extent of the slowdown of Indian economy has surprised many including “us here at the IMF”

• Continued fiscal consolidation over the medium term 

Gopinath also suggested continued fiscal consolidation over the medium term - both at the Centre and State levels - to lower elevated public debt levels, supported by further steps to increase tax compliance and administration, as well as improve fiscal transparency.

•  Labour, land, and product market reforms 

Lastly, she also suggested some structural reforms such as labour, land, and product market reforms aimed at enhancing competition and governance, along with infrastructure investment, should be a priority to create more and better jobs for India’s young and rapidly growing labour force.

Picture Credit: Yahoo News

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