Saturday, September 2 2006 12:22 Hrs (IST) - World Time -

Washington: The International Monetary Fund (IMF) says India needs to make its financial system more efficient and carry forward structural reform to make it more capable of benefiting from the world economy.

India continues to grow strongly averaging an above-trend of 8 percent in the last three years but some inflationary pressures are also building, IMF managing director Rodrigo de Rato said at a press briefing.

"So, in that respect, monetary authorities and their efficiency is very important and it has been shown already, as it is the need to make the financial system more efficient and with bigger competition," he said.

IMF also saw the need for structural reform that will make India more capable of benefiting from the world economy. Certainly structural impediments, not only in terms of flexibility in the markets but also in terms of infrastructure, are a key question in the Indian agenda for the future.

India is one of the countries that has been changing in "a very positive direction... (and) we see the government's reform agenda as a very important one as, for instance, the VAT reform of last year shows", de Rato said.

"But of course the question here is not so much what has been done in the past, although what is happening today has roots in the past, but how we can face the future."

Asked to comment on India's reported reservations on the IMF executive board's decision Thursday to immediately increase the voting power of China, South Korea, Turkey and Mexico, de Rato said it was for individual countries to explain their position and he had "respect for any position".

"The initial ad hoc increase will only correct about one-third of the very heavy under representation of four countries that by every measure you use are underrepresented. Many other countries are underrepresented too, but these four cases were accepted by the board as ones that were much more out of line than others," he said.

The IMF board resolution, which still has to be approved at the fund's annual meeting in Singapore Sep 19, also sets forth a plan for determining voting shares by 2008.

"At present, I think that all members recognized that relative quotas and voting shares do not adequately respond to the reality of the world economy of the year 2000. Asia is a good example but it's not the only example. I want to say that very clearly," de Rato said.

There are underrepresented countries in Asia as there are underrepresented countries in other areas of the world. But for an institution that wants to be legitimate in the world, having economic weight as the centre of how countries express their views and have their voting power, it needs to rebalance that situation regularly.

The annual meetings of the World Bank and IMF in Singapore will provide an opportunity to discuss the world economy and the surveillance role of IMF in helping economies individually, and the role of the economy as a whole to continue in a growing path in the future, de Rato said.

Turning to the outlook for the global economy and for Asia, de Rato said China and India continue to grow strongly. Many others countries, including sub-Saharan Africa, are enjoying a continuation of the strong growth that was seen in 2005 and have bright prospects for 2007.

For Asia, growth remains strong. Some modest rebalancing of growth is likely as exports moderate with slowing global growth because of certain markets in the US.

China is becoming an increasingly prominent driver of growth in Asia, and Japan's continued expansion has also contributed to buoyant activity.

"We see that inflation should remain subdued, and the region's current account surplus is expected to remain broadly unchanged, although the surplus that remains in Asia, if we exclude China, is declining," he said.

"While that outlook is good, there is in Asia also some near-term risks that I think policymakers have to take into consideration apart from the ones of the whole global economy. It is clear that Asia faces risks similar to those for the world economy, and Asia is particularly sensitive to growth prospects in the US and to oil prices," de Rato said.

In addition, while the region has shown resilience to the financial market volatility in May and June, a part of the volatility in global financial markets could affect capital flows, growth prospects and inflation.