Abstract
This 2009 Article IV Consultation highlights that India’s medium-term growth prospects remain bright. Prompt fiscal and monetary easing, combined with the fiscal stimulus already in the pipeline and the return of risk appetite in financial markets, have brought growth close to pre-crisis levels. Risks to a favorable outlook stem primarily from difficulties in implementing productivity-enhancing reforms and continued supply bottlenecks. Executive Directors have congratulated the authorities on their strong record of sound macroeconomic policies and decisive actions leading to India’s early and vigorous recovery from the global crisis.
1. This statement contains information that has become available since the staff report was circulated to the Executive Board. This information does not alter the thrust of the staff appraisal.
Economic and financial developments
2. Activity indicators have gathered further momentum. Industrial production growth rose to 11.7 percent y/y in November, with both consumer durables and capital goods picking up steam. Export growth also rose sharply, reaching 15 percent y/y in December. The new orders and new export orders components of the manufacturing PMI (both of which are above the expansionary threshold) have risen substantially in December, pointing to a continuation of robust growth in domestic demand and exports.
3. Inflation pressures have intensified. Headline WPI inflation rose to 7⅓ percent y/y in December (12 percent in sequential terms, using the 3-month moving average saar), in part because of large food price gains. CPI inflation measures are in the 13½–17¼ percent range, given the higher weight of food in the consumption basket. But core inflation—excluding food and energy—has also continued to accelerate, reaching 5⅔ percent in sequential terms.
4. Financial conditions have continued to improve. Net portfolio inflows have surged, reaching US$3.2 billion so far in January (compared to a monthly average of US$2 billion in March–December 2009). Credit growth, which had dipped below 10 percent y/y in October, reached 14⅓ percent y/y in December 2009.
Policy developments
5. On January 14, the government announced several measures to tackle rising food prices by improving the availability of major agricultural products. The government will release 2–3 million tons of wheat and rice in the open market above the allocation made under the public distribution system and has advised states to remove the VAT on imported sugar and to enforce anti-hoarding measures.
6. In January, the Reserve Bank of India has allowed repos in corporate debt securities and exchange trading of major currencies futures against the rupee.