India must push reforms, liberalisation to attract capital: IMF's Krishna Srinivasan

India must push ahead with trade liberalisation, labour market flexibility, and regulatory clean-up to boost private investment and attract foreign capital, International Monetary Fund's Krishna Srinivasan said. In an interview to ET's Deepshikha Sikarwar, Srinivasan, director of IMF's Asia Pacific department, said a rollback of recent tariffs by the US could lift India's growth back to its 6.5% potential over the medium term. Edited excerpts: What is your assessment of the Asia-Pacific region and India amid tariff tensions?
Our numbers for global growth are 3.2% this year, and for next year...3.1%. That reflects a combination of factors. For Asia-Pacific, the growth in 2025 is projected at 4.5%, slightly down from 4.6% in 2024, and it's expected to decline further to 4.1% in 2026. The region's resilience can be attributed to three factors. First, compared to April, tariffs have been much lower as countries have negotiated trade deals. Second, countries across the region have provided policy support, both monetary and fiscal. Third, domestic conditions have been accommodative. These three factors together explain why the region has been more resilient than expected in April. The region will contribute about 60% of global growth this year and next. In India, there are some peculiar characteristics. The second quarter ending in June came out very strong at 7.8%, much higher than expected. That provides a strong carry over for the year. Against that, two other factors come into play - tariffs and GST reforms. Tariffs have an adverse impact, but GST reform will support consumption. Taking these three factors together - stronger Q2 growth, tariff impact, and GST support - we have raised our forecast for 2025-26 to 6.6%. For next year, we have lowered the forecast to 6.2%, assuming that the 50% tariffs introduced in August remain in place. If India negotiates a deal to reduce these tariffs, there will be an upside risk to growth. After that, we expect growth to return to around 6.5% over the medium term. India has set itself a target of becoming a developed nation by 2047, which requires much higher sustained growth. What policy interventions are needed?
Our medium-term growth forecast is 6.5%. To achieve the Viksit Bharat goal by 2047, growth needs to be upwards of 8%. A strong macroeconomic policy framework is essential, and India is performing well in that regard. Fiscal discipline has been maintained, and inflation is easing. Beyond that, India needs strong structural reforms. The current trade tensions provide an opportunity for trade liberalisation. To compete globally, India must scale up and become more competitive. Flexible labour laws are needed - they have been announced, but implementation remains uncertain. Regulatory streamlining, or what we call "regulatory cleanup," is also essential, as many regulations exist without clear purpose. Strengthening insolvency frameworks and judicial capacity is equally important. These may seem secondary, but they are crucial to unlock private sector potential. You have spoken about trade liberalisation, whereas many countries are now turning protectionist...
Even before the current wave of protectionism, we had been advocating trade liberalisation in India. Competing globally requires allowing the private sector to import intermediates more cheaply. You are right that global tensions have increased, but India's bilateral trade agreement with the UK is a good example of progress. Similar deals with the EU and Australia will help diversify both export and import markets. Currently, India is quite exposed to two regions, particularly the US. Diversifying export and import markets is important. Liberalising trade through bilateral or plurilateral agreements - it doesn't have to be multilateral - can help. India could also consider joining the CPTPP (a free-trade agreement between 12 countries, including Australia, Japan, Canada, Mexico and the UK). These are viable paths toward trade liberalisation. You mentioned deregulation. Could you identify some areas where it is needed?
India continues to be one of the fastest-growing large economies, but private investment must pick up to create the jobs required by its young population. The Digital India initiative has been a major reform, but both entry and exit need to be made easier for firms. Some companies have exited India and later returned because the exit process had become smoother - and that flexibility is vital. Labour laws also need greater flexibility. Regulation should be reviewed sector by sector, to identify areas for streamlining. Policymakers are already working on this, but implementation must be faster.