Oil price fall a windfall for India, IMF says

The collapse in global oil prices is a large windfall for India and it has made room for more spending on goods and services, the IMF has said.

"The collapse in global oil prices is a large windfall gain for India. The windfall has made room for more spending on goods and services, helped improve the external and fiscal positions, and allowed a sharp decline in inflation," Paul Cashin, Head of the International Monetary Fund (IMF) team for India, said on Wednesday.

In its latest report, the IMF has projected India's gross domestic product (GDP) growth from 7.3% in this fiscal year to 7.5% in the next year, even as the economic recovery has been uneven.

The pick-up in the investment cycle is yet to gain strength, the banking system is weighed down by bad loans, and the weaker global economy has hit India's exports, it said.

The IMF has said as the private investment continues to show only a few signs of revival, the challenge for India is to sustain its growth momentum.

An increase in public infrastructure investment and government initiatives to unclog stalled investment projects are helping bolster investor sentiment and having a positive impact on private investment, it said.

"Nonetheless, project implementation and supply-side challenges have been a drag on corporate investment for several years and they have chipped away at the financial strength of core industrial sectors, so the investment recovery is likely to be sluggish," Cashin said.

"Weakened bank asset quality and profitability mean that banks are also becoming more cautious in their lending, which could hobble economic growth," he said.

He welcomed the Reserve Bank of India's (RBI) recent steps toward more stringent recognition and more effective resolution of distressed bank loans as well as the raising of banks' loan loss provisions.

According to IMF, with the global growth weaker, India will have to continue to rely mainly on domestic demand as a key source of growth.

"Increasing capital buffers in public banks, which in our assessment is manageable even in a severe stress scenario, and implementing governance reforms in public sector banks along with the new bankruptcy law, are of key importance to ensure the durability of India's growth recovery," Cashin said.

He said the adoption of the flexible inflation-targeting framework in early 2015 is a very positive development.

"The new framework is simple, has clear objectives and provides operational autonomy for the RBI in setting monetary policy," Cashin said.

The report notes that household inflation expectations remain high, and breaking away from this pattern will likely require a prolonged period of low inflation.

In the near-term, inflation risks stem from an unfavourable monsoon and expected wage increases of government employees as a result of a once-a-decade wage adjustment, the IMF has said.