India’s near-term growth outlook has improved and the balance of risks is now more favorable, helped by increased political certainty, several policy actions, improved business confidence, lower commodity import prices, and reduced external vulnerabilities. Nonetheless, high inflation expectations and wide fiscal deficits remain key macroeconomic challenges, resulting in limited policy space to adopt countercyclical policies. Supply-side bottlenecks and structural challenges—particularly in the agriculture, mining and power sectors—constrain medium-term growth and hinder job creation. Risks are still tilted to the downside, with the main external risk stemming from surges in global financial market volatility. On the domestic side, a further weakening of bank and corporate balance sheets could pose risks to economic recovery and weigh on financial soundness. Sustained low global energy prices constitutes an upside risk to growth and downside risk to inflation, and would help contain both external and fiscal imbalances. Key Policy Recommendations: • Despite recent moderation in headline inflation, underlying inflationary pressures and upside risks remain. Monetary policy should remain tight to reduce inflation and inflation expectations durably. • Fiscal consolidation should continue. The quality of the consolidation should be improved, underpinned by comprehensive tax reform (such as introducing the goods and services tax and improving tax administration) and measures to further reduce subsidies. • To safeguard financial stability in the presence of rising corporate and banking sector strains, regulation should be further enhanced, provisioning increased, monitoring of corporate vulnerabilities strengthened (especially in light of large unhedged FX exposures), and debt recovery by banks further encouraged. • Should external pressures from global financial market volatility resurface, rupee flexibility is an important shock absorber, complemented by tightening of the monetary stance, with foreign exchange intervention limited to preventing excessive volatility. • While several policy actions have been taken recently, further steps in relaxing long- standing supply bottlenecks, especially in energy, mining and power sectors, as well as labor market reforms, are crucial to achieving faster and more inclusive growth.
More : http://www.imf.org/external/pubs/cat/longres.aspx?sk=42767.0&hootPostID=5c664b8dc70fc0c10ef8d65dca86b20f
Full Report : http://www.imf.org/external/pubs/ft/scr/2015/cr1561.pdf