IMF wants India to eliminate mandatory investment norms

The International Monetary Fund (IMF) wants India to gradually eliminate the norms that make it mandatory for banks and other saving funds to park a portion of their funds in government securities. Making a case for strengthening of fiscal discipline, the IMF said in a report on India, "Strengthening financial market control mechanism involves gradually eliminating the availability of significant non-market based and captive sources of financing." According to the current guidelines, banks are required to park 24 per cent of their deposits in the government securities and government notified bonds. Similarly, National Small Savings Fund have to invest money in state governments' securities. It said that India needed a range of additional reforms which could help in strengthening fiscal discipline in the country. The report talks of eliminating such statutory liquidity requirement for banks to hold state issued paper, compulsory investment by the National Small Savings Fund in state debt and borrowings from public accounts. These suggestions appear in IMF's country report, which has been posted on the website of the Fund recently. Meanwhile, in terms of the reforms for state's finances, the multilateral lending agency also suggested cooperative arrangements between states and the Centre for a better framework. The reforms could work on transforming existing cooperation frameworks such as the bi-annual conferences of State Finance Secretaries into forums where both the Centre and the states could discuss subnational financial reforms and borrowing ceilings, the report said. The reforms could also aim at reducing states' dependence on central transfers, simplify the transfer system, and review the design of the transfer system on the basis of needs and fiscal capacity of the different states.