Washington, July 17: The International Monetary Fund (IMF) has urged India to effect a substantial increase in petroleum product prices as part of a larger effort at fiscal consolidation coupled with structural reforms to maintain the momentum of growth.

The IMF, in its statement on the Indian economy which followed the July 2, 1997 meeting of the fund's representatives with Indian officials, said the gross domestic product (GDP) rose by 6.5 per cent in fiscal 1996-97 and averaged nearly 7 per cent in the last three years.

"This robust growth, together with rising savings and investment rates, points to the continuing strong response to the economic reforms initiated in 1991. Nevertheless, the growth momentum weakened during the year," the statement mentioned.

The reforms which the IMF listed as being essential to maintain the momentum of the country's economic growth include a substantial increase in petroleum product prices, more flexible exchange rate management, exit policy, privatisation of state-owned firms, removal of remaining import quota barriers on consumer goods and reduction of reservation for the small-scale sector.

It also recommended easing of restrictions on foreign banks, reduction of tax exemptions and early elimination of remaining restrictions on current account transactions.

The earlier practice of keeping results a top secret has been dispensed with by the IMF, and it now issues a press summary of the executive board's comments.

The deficit on the oil pool account, pegged at Rs 15,500 crore at the end of fiscal 1996-97, and estimated to go up by another Rs 9,000 crore during the current financial year, rose sharply, mainly because increasing oil import prices were not passed on fully to the consumers.

The IMF has also recommended using part of the savings made on social sectors like health and education. This can be done by keeping defence expenditure low. It also urged India to cut down deficits of the central and state governments and state-owned corporations which are now pegged at 9.5 per cent of the gross domestic product.

Other recommendations included vesting the Reserve Bank of India with more operational independence, further liberalising equity inflows and foreign direct investment, reduction in subsidies and more focussed targeting of such welfare measures, and increase in the private sector's role in bank management with a view to enhance efficiency.

Praising the Indian economy's strong growth, achieved without any major sign of escalation in inflation, the IMF said it was a sign of "continuing robust supply response to the structural reforms initiated in the early 1990s."

The IMF said the economy's external situation strengthened considerably during 1996-97 as despite a sharp fall in export growth, the current account deficit declined to just over 1 per cent of GDP.

The capital account benefited by strong inflows of private capital although foreign direct investment remained low by south east Asian standards.

While the IMF directors, who had visited India earlier this month under a procedure for annual consultations with member states, commended the authorities for pursuing policies that had set the economy on a new course of modernisation to fit in with the global markets, they also cautioned that vigilance was required to avoid a build-up of demand pressures. The IMF said the RBI responded to upward pressures on the exchange rate with substantial foreign exchange purchases, and international reserves rose to $ 24.5 billion, equivalent of over six months of imports, by the end of May 1997.

The directors welcomed India's target of lowering the central government deficit to 3 per cent of GDP by the turn of the century, but emphasised that there was a need for more ambitious efforts to reduce overall public sector deficit decisively.

A few directors expressed disappointment over India's failure to reach an agreement at the World Trade Organization for phasing out quantitative restrictions on imports on balance of payments considerations.

Sharing the view that the recent slowdown in industrial production and exports was, to a considerable extent, a consequence of partial nature of reforms, they said such half-way reforms contribute to infrastructural bottlenecks.

The IMF also underlined the need to accelerate the disinvestment programme apart from the need to phase out fertiliser subsidies. At the same time, the continuation of strong economic growth without major signs of an acceleration in inflation was welcome evidence of continuing robust supply in response to the structural reforms.

The IMF wanted India to make a decisive progress toward fiscal consolidation and push forward with the still long remaining agenda for structural reforms to sustain high growth, reduce poverty and realise its economic potential.

Discussing the agenda for reforms, the directors stressed the importance of further trade liberalisation -- including further tariff cuts and a more rapid elimination of remaining quantitative restrictions on consumer goods -- and a more comprehensive easing of small-scale sector reservations. Some directors called for easing restrictions on the operations of foreign banks in India.

Another key priority for structural reform should be to establish more effective exit policies in order to facilitate the redeployment of resources across sectors, the report added.

The IMF document said that at the central government level, the recent tax rate cuts needed to be complemented with measures to expand the base, reduce tax exemptions and improve tax administration. Welcoming the authorities' approach of promoting public discussion on the issues of subsidies through the issuance of a "white paper", it said more vigorous efforts were needed to improve public enterprise performance.

While surging private capital inflows signaled confidence in the Indian economy, the directors warned that such inflows could lead to an unintended loosening of monetary policy unless the exchange rate was managed flexibly.

The directors called for a cautious stance on monetary policy. Noting the present high level of liquidity in the banking system, they cautioned particularly against the possibility of rapid rates of credit creation.

They stressed that the authorities should not resist increases in interest rates -- particularly at the short-end -- in the event of a pick up in credit demand.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.