IMF warns India over public sector banks, advocates privatisation

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The International Monetary Fund (IMF) has cautioned India against macro-financial risks which emerged from the government ownership of the public sector banks and suggested to the country that it should consider privatisation of these lenders.

In its review of India under Article IV,  IMF also flagged external vulnerabilities on rising import bill, particularly from increasing oil prices and global protectionist measures.

The review done by executive directors of IMF said systemic macro-financial risks persist, as the weak credit cycle could impair growth and the sovereign-bank nexus has created vulnerabilities.

IMF underscored the importance of a comprehensive plan to improve the governance, internal controls, and operations of public sector banks, including by considering more rapid withdrawal of public ownership.

Persistently-high household inflation expectations and large general government fiscal deficits and debt remain key macro economic challenges, it said.

The directors supported the recent tightening of monetary policy. The review was done when RBI had announced the monetary tightening in June. It highlighted the need for RBI to raise the repo rate further. RBI had in fact done so in its August policy. 

Domestic risks pertain to tax revenue shortfalls related to continued GST implementation issues and delays in addressing the twin balance sheet problems and other structural reforms.

IMF directors emphasised the importance of modernising labour laws and regulations and other measures to help increase formal employment, particularly the employment of women. 

They considered that these measures would lead to increased productivity growth and help India harness the demographic dividend from a large number of younger workers.

It, however, said external risks are contained and risks, in general, have downward bias.

"External vulnerabilities remain contained but have risen. The current account deficit (CAD) widened to 1.9 per cent of GDP in FY 2017-18, on rising imports and oil prices," it said. 

Gross international reserves rose to $424.5 billion (about 8 months of prospective imports of goods and services) at the end of March 2018, but declined to $407.8 billion in the third week of June 2018. 

On the external side, the report said risks include a further increase in international oil prices, tighter global financial conditions, a retreat from cross-border integration including spillover risks from a global trade conflict, and rising regional geopolitical tensions.

Directors welcomed the authorities’ commitment to a flexible exchange rate, noting that foreign exchange intervention should remain two-sided and limited to addressing disorderly market conditions.