India: Staff Report for the 2007 Article IV Consultation—Informational Annex

India’s strong growth and macroeconomic stability is owed to its sound macroeconomic policies and past structural reforms. Swelling capital inflows have highlighted the key policy challenges: managing financial globalization and tackling the supply constraints to growth. Monetary operations and communications are adapting to financial globalization. The Reserve Bank of India maintains a strong focus on preserving financial stability. Further fiscal consolidation is essential to sustain inclusive growth and the financial globalization. Structural reforms to make the economy more flexible are key to competitiveness and inclusive growth.


India’s strong growth and macroeconomic stability is owed to its sound macroeconomic policies and past structural reforms. Swelling capital inflows have highlighted the key policy challenges: managing financial globalization and tackling the supply constraints to growth. Monetary operations and communications are adapting to financial globalization. The Reserve Bank of India maintains a strong focus on preserving financial stability. Further fiscal consolidation is essential to sustain inclusive growth and the financial globalization. Structural reforms to make the economy more flexible are key to competitiveness and inclusive growth.

Annex I: India—Medium-Term Debt Sustainability Analysis

Macroeconomic assumptions under the baseline scenario. Economic growth is forecast to ease to potential (8 percent), and real interest rates to rise modestly (see Table 7). Fiscal consolidation will remain on hold following achievement of the FRBMA target for an overall fiscal deficit of 3 percent of GDP (see further discussion below). These policies, combined with progress in structural areas, are expected to support growth and help contain inflation.

Other working assumptions for fiscal policy include:

  • Revenue. Medium-term projections assume continued healthy growth in tax revenue, though with some slowdown in line with the turn in the profit cycle. The baseline does not assume any significant reduction in tax exemptions; policy reforms in this direction could raise revenue by a few percentage points of GDP. Similarly, the baseline does not assume any significant reforms in nontax revenue (e.g., on user fees); thus, government receipts from this source fall as a share of GDP.

  • Expenditure. Staff projections are based in large part on official projections published in the 11th Plan Approach Paper (December 2006).1 These include raising expenditure on education, health, and infrastructure, and reining in spending on nonpriority items (including subsidies). Military expenditure is forecast to remain constant in real terms. With regards to wages and salaries (for which the Sixth Pay Commission will make a recommendation by April 2008), staff assume an increase of 30 percent, phased in over two years. Because government spending on wages and salaries has been falling in real terms, this award is not projected to have a major impact on the budget deficit.

  • Off-budget bond issuance. Staff’s baseline assumption is that issuance of such bonds will diminish after 2007/08, in line with the government’s commitment to reduce expenditure on subsidies. For fuel subsidies, the baseline assumes a gradual increase in administered prices in 2008/09 (such that one-third of the additional subsidy cost is borne by consumers, as was the case in 2006/07), and a return to market-based pricing of diesel, gasoline, and LPG in 2009/10. The price of kerosene, which is primarily consumed by the poor, would not be adjusted. For fertilizer subsidies, the baseline assumption is that off-budget subsidies will be cut in half in 2008/09, and eliminated in 2009/10.

FRBMA targets. Using the authorities’ definition of the budget, the central government is on track to meet its overall deficit target for 2008/09 (3 percent of GDP), but may find it more difficult to reach the target of central government revenue balance by 2008/09. However, there are upside risks to tax revenue that would accelerate fiscal consolidation. Based on provisional fiscal data for the states, the overall borrowing requirement of the general government—for which the FRBMA set a target of 6 percent of GDP for 2008/09—is projected to be met in 2007/08, a year ahead of schedule.

Using an augmented definition of the budget deficit, which includes off-budget, subsidy-related bond issuance that staff consider quasi-fiscal expenditure, attainment of the FRBMA targets would be more difficult. Under the assumptions for subsidies described above, staff’s baseline projection for the augmented central government balance in 2008/09 is 3.9 percent of GDP, suggesting that measures of about 1¼ percent of GDP would be needed to meet the deficit target. Achieving revenue balance would require measures of 2½ percent of GDP.2

Debt path. Under the baseline scenario, which projects an augmented general government deficit of 7 percent of GDP in 2007/08 and a 0.3 percentage point of GDP average annual adjustment thereafter, gross public debt would decline over five years to 62 percent of GDP.

Sensitivity analysis. A gradual decline in the debt-to-GDP ratio would still occur under various shocks, including in a scenario where the growth-interest-differential returns to its historical average (Figure I.1 and Table I.1). Only in the case of a return to historical averages for the primary balance, real GDP growth, and real interest rates would the debt ratio rise over the medium term.

Figure I.1.
Figure I.1.

India: Public Debt Sustainability: Bound Tests 1/

(Public debt, in percent of GDP)

Citation: IMF Staff Country Reports 2008, 051; 10.5089/9781451947465.002.A002

Source: Fund staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2008, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
Table I.1.

Country: Public Sector Debt Sustainability Framework, 2002–2012

(In percent of GDP, unless otherwise indicated)

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Source: Fund staff estimates, calendar year data.

General government debt covers central and state governments.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1 +g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Annex II: India—Relations With the Fund

(As of October 31, 2007)

I. Membership Status: Joined 12/27/45; Article VIII.

II. General Resources Account

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III. SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Financial Arrangements:

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VI. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs):

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VII. Exchange Rate Arrangement:

Since March 1, 1993, the Indian rupee has floated against other currencies, although the Reserve Bank of India intervenes in the market periodically. As per the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), the exchange rate in India is classified as managed floating with no pre-announced path for the exchange rate. On August 20, 1994, India accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement. India maintains the following restrictions on the making of payments and transfers for current international transactions, which are subject to Fund approval under Article VIII, Section 2(a): restrictions related to the non-transferability of balances under the India-Russia debt agreement; restrictions arising from unsettled balances under inoperative bilateral payments arrangements with two Eastern European countries; and a restriction on the transfer of amortization payments on loans by non-resident relatives. The Executive Board has not approved these restrictions.

VIII. Article IV Consultation:

The previous Article IV consultation discussions were held in October 2006. The staff report (IMF Country Report No. 07/63) was discussed by the Executive Board on December 20, 2006.

IX. FSAP Participation and ROSCs:

The data model of the ROSC (IMF Country No. 04/96) was issued in April 2004; a fiscal transparency ROSC was issued in February 2001.

X. Technical Assistance:

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XI. Outreach and Other Activities:

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XI. Resident Representative:

A resident representative’s office was opened in November 1991. Mr. Joshua Felman has been Senior Resident Representative since August 2006.

Annex III: India—Relations with the World Bank Group

In (Indian) FY2006–07 (April 1-March 31), Bank lending to India reached $2.45 billion, up from $1.89 billion in FY05-06.3 World Bank support to India in Bank FY2008 is expected to increase and again reach its targeted level consistent with the CAS. IFC also recorded a strong commitment in Bank FY2007 of $1.047 billion. The World Bank Group’s program of support combines policy dialogue with diversified IBRD/IDA lending, IFC investments and analytical and advisory activities in the sectors that are important to reducing poverty and sustaining growth.

The Bank Group’s Board of Directors discussed a new Country Strategy (CAS) for India on August 26, 2004. The CAS jointly covers the programs of IBRD/IDA and IFC for the period of FY05–08. An update to the Strategy was presented to the Board on May 9, 2007. With over one-quarter of the world’s poor in India, the overarching challenge is how to scale up the impact of Bank Group assistance in order to help India move closer to achieving its development goals—including the goal of halving poverty by 2015.

Scaling up assistance will entail a strengthened Bank Group program at the Center, as well as more lending to the states compared to recent years. For state level lending, the strategy is to retain an essentially reform and performance-based approach to the states, but also seek new opportunities for engagement with the largest and poorest states in India in order to help strengthen the environment for reform. The expansion in lending will primarily be for investment in infrastructure development, human development and rural livelihoods. Through adjustment lending, continued emphasis is also being placed on support to fiscal and governance reforms at the state level.

Adjustment lending to finance state level reforms will be limited to 15 percent of total IBRD/IDA lending for the CAS period. Overall lending levels will fall within an upper bound of $2.15 billion per year for IBRD, on average for the four years of the CAS, and the IDA limits for India established by the IDA Deputies. Financial operations since 1998/99 are summarized below.

Annex IV: India—Relations with the Asian Development Bank

The Asian Development Bank (AsDB) operations in India began in 1986. Cumulative public sector loan commitments totaled $17.13 billion as of December 5, 2007 for 98 loans. With an additional $0.8 billion in private sector loans (the latter without government guarantee), total loan commitments amounted to $17.93 billion. These funds have been provided from the Bank’s ordinary capital resources (OCR). Also, AsDB has approved equity investments amounting to $0.2 billion. AsDB’s lending and equity activities are summarized below.

India: Asian Development Bank Financial Operations

(In millions of U.S. dollars, as of December 5, 2007)

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Source: Asian Development Bank.

AsDB’s is currently preparing its Country Partnership Strategy (CPS) for 2008–12. Core operational strategy in India will continue to focus on poverty reduction through infrastructure-led growth. More than 75 percent of its ongoing and proposed assistance focuses on transport (national highways, state roads, and rural roads), urban (water and sanitation, waste management, urban transport, city planning, and municipal reforms), and energy (power sector reforms, investments for upgrading transmission and distribution systems, hydropower generation, and improvement in energy efficiency) sector operations.

Annex V: India—Statistical Issues

1. Macroeconomic statistics are adequate for surveillance, but weaknesses remain in the timeliness and coverage of certain statistical series. India has an elaborate system for compiling economic and financial statistics and produces a vast quantity of data covering virtually all sectors of the economy. India subscribed to the SDDS on December 27, 1996 and started posting its metadata on the Dissemination Standards Bulletin Board on October 30, 1997. It is currently in observance of the SDDS, although it uses flexibility options for timeliness of data on general government operations and on the periodicity and timeliness of labor market data.

2. The data module of the Report on Observance of Standards and Codes (ROSC, IMF Country Report No. 04/96) was published in April 2004. It assesses India’s data dissemination practices against the SDDS requirements and assesses the quality of six datasets based on the Data Quality Assessment Framework (DQAF) developed by STA.

3. National accounts: The Central Statistical Organization (CSO) has recently reduced the dissemination lag for quarterly releases from three to two months and released a new series of national accounts, with base year 1999–2000 in February 2006.

4. Price statistics: The consumer price indices (CPIs) are based on weights that are over ten years old and do not fully capture price developments in the economy. However, since January 2006, the Labour Bureau has published a revised CPI for industrial workers with a 2001 base year and a Working Group is engaged in the revision of the current producer price index to a new base. Presently, there are four CPIs, each based on the consumption basket of a narrow category of consumers (namely industrial workers, urban and nonmanual employees, agricultural laborers, and rural laborers). The CPIs are published with a lag of about one month. A wholesale price index (1993/94=100) is published weekly with a lag of two weeks and is subject to large revisions, especially in periods of rising inflation. In addition, the representativeness of the index may be undermined by the collection of prices from a relatively small sample of products and the infrequent updating of weights.

5. External sector statistics: While the concepts and definitions used to compile balance of payments statistics are broadly in line with the fifth edition of the Balance of Payments Manual (BPM5), the Reserve Bank of India’s (RBI) presentation does not strictly follow the BPM5. Furthermore, trade data have quality, valuation, timing, and coverage problems, and data on trade prices, volumes, and composition are not regularly available on a timely basis. Bilateral data on services exports to the United States and other developed countries are manifold higher than counterpart services imports published by these same countries. External debt statistics are available on a quarterly basis with a one quarter lag. Estimates of short-term external debt are presented in the debt statistics on an original maturity basis. The short-term maturity attribution on a residual maturity basis is only available annually (and excludes residual maturity of medium- and long-term nonresident Indian accounts). The international investment position (IIP) statistics cover the sectors prescribed in the BPM5 and these data are disseminated within six months of the reference period in respect of annual data. Coverage of direct investment positions data is hampered by the absence of appropriate legal or institutional authority. India began disseminating the Data Template on International Reserves and Foreign Currency Liquidity as prescribed under the SDDS in December 2001. The more up-to-date information on certain variables, such as total foreign reserves, foreign currency assets, gold, and SDRs, are available on a weekly basis and are disseminated as part of a weekly statistical supplement on the RBI website.

6. Monetary and financial statistics: The RBI website and the RBI Bulletin publish a wide array of monetary and financial statistics, including reserve money and its components, RBI’s survey, monetary survey, liquidity aggregates (outstanding amounts), interest rates, exchange rates, foreign reserves, and results of government securities auctions. The frequency and quality of data dissemination have improved substantially in recent years.

7. Concepts and definitions used by the RBI to compile monetary statistics are in broad conformity with the guidelines provided in the Monetary and Financial Statistics Manual (MFSM). Nevertheless, the following concepts and principles deviate from the MFSM. First, the resident sector data do not provide sufficient information on the sectoral distribution of domestic credit. Specifically, under their present sectorization scheme, the authorities subdivide the resident nonbank sector data by (i) central government, (ii) state government, and (iii) the commercial sector (including other financial corporations, public and other nonfinancial corporations, and other resident sectors). Second, commercial banks add accrued interest to credit and deposit positions on a quarterly basis only (instead of the prescribed monthly basis).

8. The RBI reports monetary data for IFS on a regular basis. Since October 2006, the RBI has initiated the electronic reporting of monetary data, which is a major improvement from the previous paper-based reporting which were prone to errors and delays. India has also submitted to STA test data (starting from December 2001 data) on the Standardized Report Forms (SRFs) that have been developed to implement the methodology outlined in the MFSM. STA is working with the authorities in resolving the outstanding data issues on the development of the SRFs.

9. Fiscal operations: The Ministry of Finance (MoF) posts selected central government monthly fiscal data and quarterly debt data on its website. However, no monthly data on fiscal performance at the state level are available, and annual data are available only with an eight- to ten-month lag. Consolidated information is unavailable on local government operations. In addition, data on the functional and economic classification of expenditures are available with considerable lag. There is also scope to improve the analytical usefulness of the presentation of the fiscal accounts. For example, classification of government expenditure between developmental/nondevelopmental and plan/nonplan obscures the economic nature and impact of fiscal actions. The MoF reports central government data (on a cash basis) for publication in the Government Finance Statistics Yearbook (GFSY) (latest reported data correspond to 2006). Some limited general government data has been reported for 2002.

Table V.1.

India—Table of Common Indicators Required for Surveillance

As of December 7, 2007

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, and rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Biweekly (BW), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

Reflects the assessment provided in the data ROSC (published on April 2, 2004, and based on the findings of the mission that took place during May 13–30, 2002) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 7, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies.


Updated projections for the 11th Plan are being finalized, but are not expected to show significant changes.


In 2007/08, a special (non-recurring) dividend received from the RBI, which staff include under nontax revenue (and the authorities include under capital receipts), lowers the revenue deficit by 0.7 percent of GDP.


In Bank FY2007 (July 1–June 30), Bank lending totaled $3.75 billion, up from $1.42 billion in FY2006.

India: 2007 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for India
Author: International Monetary Fund