The Central Statistical Organisation (CSO) has estimated India’s economic growth rate for the current fiscal at 5 percent, the lowest in a decade. That was not surprising. On Wednesday, the International Monetary Fund not only made that prognosis but also did some diagnosis.

For quite some time, prime minister Manmohan Singh, finance minister P Chidambaram, his predecessor who is now our president, planning commission deputy chairman Montek Singh Ahluwalia and others responsible for taking our economy where it is going have blamed the external scenario for the downturn. From the financial meltdown to the overall weak global conditions, much has been cited for the simple reality that economic activity on the ground here is not picking up.

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IMF, however, has advised the above-mentioned not to blame it elsewhere but on themselves. Along with the annual formal consultations with India, the IMF prepared a report, released this week. This is what it has to say on ‘Growth Slowdown’:

“GDP growth has slowed more than external factors can explain. Falling infrastructure and corporate investment led the slowdown, though exports and private consumption are now also suffering (Figure 1). Global factors have hurt exports and weighed on investment, but India’s growth has slowed by more than the decline in trading partners’ growth would imply. Capital inflows remain resilient and international financing conditions favorable, suggesting that so far the financial channel has not been prominent in the transmission of external shocks (Figure 2).” [For figures, see page 6 of the full report attached below.]

The solution IMF has advised is something Manmohan Singh et al are trying very hard to implement in the face of justifiable opposition: faster reforms especially in land acquisition, labour laws and so on. They find a mention in the following key issues IMF placed on the table for discussions:

Outlook and Risks
The economy has slowed markedly due to a confluence of structural, external and other factors. Recent measures taken by the authorities have boosted confidence, but the near-term outlook is for a subdued recovery with still elevated inflation as investment has been significantly hit and supply bottlenecks will ease only slowly. Risks are on the downside, but stronger structural reform could lead to better outcomes.

Structural Reform
Building on recent progress is crucial, especially to address supply constraints in energy and move the pricing of various natural resources toward a market basis. Progress on taxation, land acquisition, and labor market reform, along with 12th Plan goals on infrastructure, skills mismatches, and social outcomes, are necessary to return to a rapid rate of growth and poverty reduction.

Demand-Management Policies
The Finance Minister’s renewed commitment to fiscal consolidation is welcome, as is the plan to switch to cash transfers, which should improve expenditure efficiency over the medium term. Sustainable fiscal consolidation and reorientation of spending toward investment and social sectors, however, will require tough choices on subsidy reform and an overhaul of taxation. Maintaining policy interest rates unchanged until inflation is clearly on a downward trend is the best way for monetary policy to support growth. The floating rupee and continued prudent liberalization of the capital account will improve resilience to external shocks.

Financial Reforms
Tightening mechanisms to address deteriorating asset quality will promote healthier banks’ balance sheets, but supporting faster growth and reaching Basel III targets will also require capital injections in public banks. In addition, addressing concentration risks, strengthening creditor rights, and supporting capital market development will lay the groundwork for a stronger recovery.

Jobless growth

Meanwhile, ahead of Chidambaram’s eighth budget and the UPA II’s election budget, bad news continue to pour. The planning commission’s own think tank, no less, has slammed the government’s economic policies for “jobless growth” — even if that growth comes to a mere 5 percent. Read more here.