India's growth over the past four years has been 'very solid', said IMF's Chief Economist Maurice Obstfield on Sunday. He also praised the economic reforms such as the GST and the Insolvency and Bankruptcy Code carried out by the government.
Obstfeld, 66, -- who is set to retire this month-end -- will be succeeded by Gita Gopinath, the second Indian to be appointed to the position.
"There are important vulnerabilities, so it is important for the reform momentum to be maintained even as an election comes up and for the path of fiscal adjustment to be maintained," Obstfeld added.
He said one risk that has become much more evident in the last few years has been non-bank finance, usually called shadow banking.
"There is a big challenge of stricter, oversight," the economist said.
Noting that there has long been a legacy of corporate debt associated with bad infrastructure projects in India, Obstfeld said it has been very concentrated in banking system.
"But as the government is trying to better oversee the banking system, these loans have migrated to shadow banking and that is an area where more needs to be done to contain financial pressures, which we are beginning to see in India," he said.
However, with an upcoming election in the country, there is a reluctance to do anything that would slow the economy, Obstfeld said, observing, "But the lesson of experiences is that financial vulnerabilities can go south very quickly".
He added that it is important for the Indian government to heed the RBI's message on financial stability. Addressing a group of journalists in Washington, e also said the International Monetary Fund does not want politicians "manipulating" central banks for political ends.
"There is debate over whether it's better for financial stability to be the remit of the central bank or an independent regulator...the UK in 1997, split them, then put them back together again. I'm not going to take a position on that...But I think...the central bank does have to be intimately concerned with financial stability to some degree and with the payment system," he said, responding to a specific question on the recent developments in India regarding the RBI and the government.
"We need to think about what is the best institutional framework in which financial policy can be set with regard to long term stability of the economy, not just to performance over political horizon," Obstfeld said.
"Well, I think they (the RBI and the Indian government) have reached an agreement on how to proceed. I think their (RBI) message that financial stability is important is correct. And it is important for the government to heed that," he added.
(With PTI inputs)