GST to push India's growth but bad loans still a problem: IMF

Washington: The ambitious Goods and Services Tax to be implemented from July 1 would help raise India's medium-term growth to above eight percent, the IMF has said, but expressed concern over the health of the country's banking system.

Observing that India is the "fastest growing emerging market economy" in the region, Tao Zhang, Deputy Managing Director of the International Monetary Fund, said the IMF believes that India will continue to grow at a fast pace, with a projected 6.8 percent rate for Financial Year 2016-17 and 7.2 percent in 2017-18.

"The government has made significant progress on important economic reforms that will support strong and sustainable growth going forward," Zhang told PTI in an interview.

"We expect that the Goods and Services Tax (GST), which is targeted to be applied starting in July, will help raise India's medium-term growth to above 8 percent, as it will enhance production and the movement of goods and services across Indian states," he said.

Zhang said the IMF is "extremely impressed" by the work that is being done.

"We expect it will pay off in terms of higher growth in the future," he said in response to a question on the reforms being undertaken by the Indian government.

Lower global oil prices have boosted economic activity, and helped lower inflation. In addition, fiscal and monetary policies have helped foster economic stability, he said.

"The currency exchange initiative led to a slowdown in economic activity. However, there are initial signs of recovery as the currency exchange has been progressing well," Zhang, who assumed the role of Deputy Managing Director at the IMF in August last year, said on demonetisation.

Zhang, who worked at the World Bank from 1995 to 1997 and at the Asian Development Bank from 1997 to 2004, said a key concern for the IMF in India is the health of the banking system which is still dealing with a large amount of "bad loans" as well as "heightened corporate vulnerabilities" in several key sectors of the economy.

In India, bad loans of public banks rose by over Rs 1 lakh crore to Rs 6.06 lakh crore during April-December of 2016-17, the bulk of which came from power, steel, road infrastructure and textiles sectors. The gross bad loans stood at Rs 5,02,068 crore at the end of 2015-16.

Zhang also stressed on the need for labour market reforms in India.

"As India persists with its strong reform efforts, labour market reforms should take priority," he noted.

These would facilitate greater and better quality jobs, raise female labour force participation and enhance the impact of recent product market reforms, he observed.

"While there has been important progress generally, we see scope to pursue better targeting and greater efficiency of subsidy and social spending programmes through greater use of the trio of Aadhaar unique beneficiary identification, direct benefit transfers and information technology," Zhang said.

"Finally, more could be done to raise agricultural productivity and enhance market efficiency. This would help increase the supply of high-value foods, enhance returns to farmers, and dampen food inflation pressures," said the IMF official responding to a question.