India
2012 Article IV Consultation-Staff Report; Staff Statement and Supplements; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for India

This Article IV Consultation reports that India’s growth remains relatively high, but various factors, including the unsettled global outlook and slow government decision making, have weighed on investment. Inflation has moderated, leading the Reserve Bank of India (RBI) to pause monetary tightening, but remains elevated. The slow pace of fiscal consolidation has added to demand pressures. Ensuring sustainable growth will require reinvigorating the structural agenda, rather than relying on monetary and fiscal stimulus. Measures to facilitate infrastructure investment, reform the financial sector and labor markets, and address agricultural productivity and skills mismatches stand out.

Abstract

This Article IV Consultation reports that India’s growth remains relatively high, but various factors, including the unsettled global outlook and slow government decision making, have weighed on investment. Inflation has moderated, leading the Reserve Bank of India (RBI) to pause monetary tightening, but remains elevated. The slow pace of fiscal consolidation has added to demand pressures. Ensuring sustainable growth will require reinvigorating the structural agenda, rather than relying on monetary and fiscal stimulus. Measures to facilitate infrastructure investment, reform the financial sector and labor markets, and address agricultural productivity and skills mismatches stand out.

CONTEXT

1. India’s growth remains one of the highest in the world, but a range of factors have weighed it down. Following a rapid recovery after the global financial crisis (GFC), the economy has slowed more than most other major emerging markets (EMs), as concerns about governance and policy uncertainty have dampened investment. Consumption, particularly in rural areas, and exports, with increasing geographical destination diversity and sophistication, have been bright spots. At the same time, inflation is elevated, and its recent moderation is primarily due to base effects. While monetary policy has been tightened, the fiscal deficit remains high.

uA01fig02

Real GDP Growth

(In percent)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: IMF, World Economic Outlook; and IMF staff calculations.

2. The unsettled global outlook has added to policy challenges. After the boom in capital inflows in 2010/11, rising global risk aversion has reduced the flow of capital. The rupee depreciated the most among major Asian currencies in 2011, partly due to India’s current account deficit. Concerns about global growth have harmed investor sentiment and deleveraging by advanced economy banks has raised the cost of external finance.

3. The authorities have a broad reform agenda, which has been implemented only slowly. Progress has been made on financial reforms—notably the liberalization of saving deposit rates and the continued opening of the domestic debt market to foreign investors—and FDI in single brand retail has been liberalized. However, important legislation to reform taxation and facilitate infrastructure building is awaiting approval. Many investors have been disappointed by the pace of reform of the present government coalition, which had been expected to accelerate implementation, and more recently have become concerned about slower government decision-making following high-profile governance scandals and increased civil activism. The 2012/13 Budget and the 12th Plan (2012/13-2017/18) are expected to propose a broad agenda for further reform, but with general elections due in 2014, the window for passing difficult measures may be short. The 12th Plan Approach Paper rightly emphasizes power, water, and agriculture investment, and better governance, health, and education.

4. Making India’s rapid growth more inclusive is an important goal. Around 1/3 of the population lives below the government’s new poverty line, down from 45 percent in 1993/1994.1 This is an important achievement, though poverty reduction has been somewhat slow compared to other countries (Box 1).

uA01fig03

Change in Poverty Rates and GDP per Capita

(Measured over most recent 10-year interval available)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: World Bank, World Development Indicators; IMF, World Economic Outlook; and IMF staff calculations.

THE CONJUNCTURE AND OUTLOOK

5. Weak investment is at the core of the recent growth slowdown. Investment, which reached 38 percent of GDP before the GFC, buoyed growth to almost 9 percent, the authorities’ often-stated goal, and likely also the 12th Plan target. Since the GFC, corporate investment has fallen. The difficulty of forecasting returns in a high-inflation environment, governance concerns, heightened global uncertainty, rising funding costs, and structural rigidities have all played a part (Box 2). Recent high frequency activity indicators (manufacturing and services PMIs) have started to recover, but it is unclear whether the improvement will extend to investment (Figure 1).

Figure 1.
Figure 1.

India: Conjunctural Developments

Growth is moderating, but inflation is still elevated.

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: Haver Analytics; CEIC Data Company Ltd., and India Premium Database; Bloomberg L.P.; and IMF staff calculations.
uA01fig04

GDP Growth

(In percent)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: Haver Data Analytics; and IMF staff estimates.
uA01fig05

Purchasing Managers Survey

Index, sa, above 50 = expansion)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Source: Haver Analytics.

6. Consumption and exports have been robust. Disposable income (wage) growth has continued to underpin private consumption, especially in rural areas. Exports have been strong during the recovery from the GFC and have generally benefitted from geographical and product diversification (Box 3). However, some moderation in consumption became visible in 2011Q3 as elevated inflation has eroded purchasing power and interest rates have risen. Exports have also softened.

Poverty and Income Inequality in India1

1. Despite high growth, poverty in India remains high. Two prominent Indian economists recently stated that “[India’s] growth record is very impressive…[b]ut there has also been a failure to ensure that rapid growth translates into better living conditions for the Indian people.”2 While poverty has been falling, the share of the population living below the World Bank’s international $1-a-day poverty line remains high (Table) and income inequality has risen. Progress on social indicators has also been slow: access to education has been broadened but malnutrition remains a problem, and infant mortality remains very high.

Indicators of Poverty and Inequality

article image

Adjusted for price and currency shifts, now comparable in India to US$1.25 a day.

Source: UNStats and World Bank. Data provided are most recent available since 2005.

2. Ensuring a more stable macroeconomic environment would lay the groundwork for reducing poverty and inequality. There is an extensive literature on how inflation can be particularly damaging to the poor, who are unable to insure against changes in prices. Recent Fund research further divides inflation into food and nonfood inflation, showing that higher nonfood inflation is generally associated with higher income inequality, while higher food inflation is associated with marginally lower inequality, both across countries and among Indian states.3 Fiscal consolidation, by reducing demand pressures, would also contribute to macro stability.

3. But structural measures will be essential in the long run. The 12th Plan will present measures to improve outcomes in health, education and agriculture, improve infrastructure to reduce regional disparities and facilitate communication, and to improve governance to raise the quality of public services. Beyond this, reforming expenditure to more accurately target subsidies to the poor and making progress on the financial inclusion agenda proposed by the government and endorsed by the recent FSAP mission would also help make growth more inclusive.

1 Prepared by James P. Walsh (APD).2 Drèze, J. and Amartya Sen, “Putting Growth In Its Place,” Outlook India, Nov. 14, 2011.3 Based on Walsh, James P. and Jiangyan Yu, 2012, “Inflation and Income Inequality: Is Food Inflation Different?” IMF Working Paper, forthcoming.

Corporate Investment in India1

1. While investment was the main driver of growth before the global financial crisis, it has been lackluster since then. Strong corporate investment drove the overall increase in investment, but it has slowed to 10 percent of GDP from 14 percent before the crisis. More recently, the quarterly growth of investment (gross fixed capital formation) has fallen to about -0.6 percent on average in the first three quarters in 2011, compared to an average of nearly 3 percent between 2000 and 2007. High frequency data suggest that this reflects weak corporate investment.

uA01fig06

India - Annual Investment1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Source: Haver1/ Investment refers to gross fixed capital formation. FY20xx refers to a fiscal year ending in March 20xx.

2. Both macroeconomic and structural factors are responsible for recent weak corporate investment. The high and volatile inflation rate and heightened global uncertainty appear to have depressed corporate investment since the global financial crisis. Monetary tightening since early 2010 may have affected it at the margin as well. However, since late 2010, quarterly investment has fallen short of levels predicted by these standard macroeconomic variables (see figure),2 which suggests that the recent low investment may also be due to structural factors, such as the business environment and governance.

uA01fig07

Headline Doing Business Rankings

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Source: World Bank

3. Staff’s analysis of firm-level micro panel data shows that profitability, liquidity, and leverage are key determinants of corporate investment in India. The significance of liquidity suggests that there remains room for improving financial access.

uA01fig08

India: Quarterly Investment1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: Haver; IMF WEO database; and staff estimates.1/ Investment refers to gross fixed capital formation.

4. India has substantial room for improving its business environment to boost corporate profitability, which is a key determinant of corporate investment. According to the World Economic Forum, India’s global competitiveness fell to 56th place in 2011 from 49th in 2009, reflecting weakening institutions (e.g., transparency of government decision making) and the relatively slow pace of infrastructure improvement. The World Bank has ranked India at 132nd out of 183 countries in the world (up from 139th in 2010) in terms of ease of doing business. In this survey, India is ranked at 166th in starting a business, 97th in registering property, and 182nd in enforcing contracts. These rankings indicate that India could do more to enhance corporate sector profitability by reducing the costs of doing business and improving institutions. In addition, according to the World Bank, there are large differences in costs of doing business across Indian cities, meaning that many cities in India can learn from its best-performing cities.

5. Micro empirical analysis confirms that lowering business costs could enhance corporate profitability. Moreover, for exporters, lowering costs to export appears to raises profitability, indicating that cutting such costs by improving infrastructure, especially transport, would be beneficial. According to staff estimates, reducing the average of each cost of doing business to the lowest among Indian cities is estimated to boost corporate investment by 3-13½ percent through raising profitability (see table).

Table. Estimated Aggregate Impact of Reducing Costs of Doing Business

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1 Based on Tokuoka, K., 2012, “Does the Business Environment Affect Corporate Investment in India?,” IMF Working Paper, forthcoming.2 Only data on overall investment (gross fixed capital formation) are available on a quarterly basis. This limitation needs to be kept in mind in interpreting the results.

India’s exports: Their Evolution and Future Prospects1

The composition of India’s exports is unique. The share of services exports, which has reached 35 percent, is higher than in advanced countries, but the share of manufacturing exports in total goods exports is still low. While services exports have a high technology content and high-value added, the goods and manufacturing exports are still dominated by relatively low-tech and low-value added products, though there is a clear shift away from traditional exports (e.g. textiles, gems, and leather products) towards medium- and high-tech products (e.g. engineering goods). Based on an index of export sophistication developed by Anand et al. (2012),2 Indian services exports are more sophisticated relative to its income level. However, India’s goods export sophistication has remained below the average sophistication level of Asia, and it is lower than China’s and Brazil’s.

The evolution of exports is expected to help India increase sophistication and diversification further and should benefit India through reallocation of resources and catch up in productivity. The sophistication and diversification of Indian exports have reached a threshold that will enable them to acquire skills and assets needed to move closer to the production possibility frontier. Growth is likely to benefit from knowledge spillovers. High exports sophistication, particularly of services, is likely to support growth. Increasing the sophistication of manufacturing exports would result in higher productivity and reallocation gains similar to those seen in the services sector. Going forward, India could benefit from realizing exports with new regions: even though exports to emerging and developing economies have increased, the potential to increase them further is substantial.

However, realizing these benefits will require trade reforms, investment in infrastructure, health and education, and labor market reforms. The key trade reform areas are reducing trade restrictiveness and improving trade facilitation and infrastructure. India’s weighted average tariff is high relative to other G20 economies. Also, India scores much below comparator Asian economies on the Overall Logistic Performance Index. A substantial investment in infrastructure, health, and education (both basic and technical) will be needed to sustain and increase sophistication. In addition, labor law reforms will be necessary to realize efficiency and productivity gains in manufacturing.

uA01fig09

Share of Services Exports

(In percent of total exports)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: Balance of Payments, IMF.
uA01fig10

Sophistication of Services Exports

(Non resource rich countries)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: IMF staff estimates.
uA01fig11

Share of High-tech Manufacturing Exports

(In percent of total manufacturing exports)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: IMF staff estimates.
uA01fig12

Sophistication of Goods Exports

(Non resource rich countries)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: IMF staff estimates.
1 Based on Anand, R., 2012, “Indian Exports: Their Evolution and Future Prospects,” IMF Working Paper, forthcoming.2 Anand, R., S. Mishra, and N. Spatafora, 2012, “Structural Transformation and the Sophistication of Production,” forthcoming IMF Working Paper (Washington: International Monetary Fund).

7. Inflation is moderating, but remains elevated compared to other EMs and is generalized. Core and headline inflation have stayed above historical averages and the RBI’s stated objectives. Pricing power in manufacturing, measured by the difference between PMI input and output prices, is still strong. While profit margins may continue to drop, inflation pressures could take time to ease as there is little or no excess capacity. Nominal wage growth has outpaced inflation since 2010. Expectations have drifted upwards, in part because consumer price inflation, which weighs food heavily, has been above 7 percent for almost four years. Rising incomes, particularly in rural areas, are leading to higher food demand and shifting its composition toward proteins and away from grains, fueling food price pressures. Large increases in agricultural support prices and the indexation of rural relief wages have also contributed. WPI inflation fell to 6.6 percent in January 2012 and CPI inflation dropped to 61/2-81/2 in December 2011, mainly due to base effects on vegetable prices, while the inflation momentum is still at about 7 percent.

uA01fig13

Inflation

(In percent year on year)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: Haver Analytics.1/ Wholesale price inflation.
uA01fig14

Price Pressure and Core Inflation

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: CEIC Asia Database; and Haver Analytics.

8. After raising policy rates by 375 basis points over the last two years, the RBI has paused, citing rising growth risks. The call money rate measured in real terms, after being negative for two years, has now risen by about 500 basis points and reached nearly 2 percent in January 2012. The authorities have also taken steps to improve monetary transmission by establishing the repo rate as the main policy rate, liberalizing savings deposit rates, linking interest rates on small savings to market rates, and through the base rate reform (Figure 2). These measures and the shift to a liquidity deficit in the money market have led to increased pass-through from the repo rate to lending rates. However, the depreciation of the NEER since July (about 8 percent) has partly offset interest rate hikes. While the RBI in January 2012 cut cash reserve requirements by 50 basis points citing tighter-than-expected liquidity, it added that policy rates will not be cut until inflation has moderated sustainably.

Figure 2.
Figure 2.

India: Monetary and Financing Conditions

Real interest rates have risen gradually, and credit and corporate issuance have slowed.

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: Reserve Bank of India; Bloomberg L.P.; CEIC Database; and IMF staff estimates.1/ The MCI is based on the average of repo and reverse repo rate and the NEER.
uA01fig15

Interest Rates

(In percent per annum)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: CEIC Asia Database; and CEIC India Premium Database.

9. The fiscal deficit remains high, adding to demand pressures. The modest decline in the deficit to GDP ratio in 2010/11 resulted mostly from one-off measures (Figure 3). With limited progress on subsidy reforms and oil prices remaining firm, the 2011/12 deficit target is likely to exceed the target by about 1 percent of GDP, despite a slower pace of capital spending compared with previous years. A midyear rise in fuel prices mitigated spending pressures, but the subsidy bill is still likely to exceed the budget by a substantial amount. Corporate tax revenues have been hit by the slowing economy and measures to broaden the base of services taxation were partly offset by cutting indirect taxes on fuels. Public debt declined to 67 percent of GDP in March 2011, due to high nominal GDP growth.

Figure 3.
Figure 3.

India Fiscal Indicators

With this year’s target out of reach, returning to consolidation will be a challenge.

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: Country authorities; CEIC Database; and IMF staff calculations.

10. Growth is projected at about 7 percent for 2011/12 and 2012/13, with inflation forecast to remain above the RBI’s comfort zone. Investment is anticipated to pick up modestly from the slump recorded in 2011Q3, as indicators of capital goods production have started to stabilize. Consumption should remain robust, but exports are cooling. Over the medium term, potential output growth is estimated at around 7.5-8 percent, assuming faster government project approvals.2 Inflation is projected at 6¾ percent in March 2012, but to stay at around 7 percent for the rest of 2012, compared to the RBI’s 4-4.5 percent near-term, and 3 percent medium-term, objectives. The current account deficit is projected to widen slightly to 2.8 percent of GDP, as exports soften along with the global economy and oil prices remain high.

11. Growth risks are to the downside. The main domestic risk is a further weakening of private investment if government approvals of projects do not accelerate, reform efforts are not reinvigorated, and inflation remains high and volatile (Box 4). At the same time, external risks continue to be elevated as Euro area growth could underperform and bank deleveraging could intensify even in the absence of a new full-fledged global financial crisis (discussed separately below).

Authorities’ Views

12. The authorities believe the Indian economy has passed the point of greatest concern with industrial activity turning up and inflation starting to ease. They estimate growth to be between 7-7.5 percent in 2011/12 and expect that it will pick up in the second half of 2012/13. While taking note of the recent moderation of quarterly growth rates, the authorities expect investment to recover as financial conditions ease and domestic sentiment improves. The trade balance has widened slightly in 2011/12, but the recent depreciation of the rupee and the continued strength of Indian exports are expected to keep it contained. These factors, combined with continued strength in consumption, are expected to bring growth in 2012/13 back toward the trend range of 8-8% percent, provided global financial risks do not materialize.

India: Risk Assessment Matrix1

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1 A similar risk matrix in the FSSA elaborates on the risks to the financial sector.2 See Annex I.

13. External factors weigh more heavily in the authorities’ assessment of the current situation, especially energy prices. Further deleveraging by European banks may have limited direct impact but second order effects on Indian banks might materialize through trade, finance and confidence channels. Since mid-2011, a deteriorating outlook in advanced economies has manifested in EMs, including India, through capital outflows, while commodity prices remain high. In 2008/09, sharply lower oil prices helped bring Indian inflation down, allowing for monetary easing while reducing the trade deficit. These beneficial effects have not occurred during the past year.

14. The RBI stresses that vigilance continues to be warranted on inflation. Disinflation could be complicated by structural factors resurfacing as pressure on food prices, especially of protein items, as well as by weak government finances and adjustments to petroleum and coal prices, which remain significantly below international prices. Noting wage-price dynamics and expectations formation in India, the RBI remains concerned about inflation risks and will look out for a sustained moderation in inflation before lowering the policy rate.

POLICY DISCUSSIONS

The domestic conjuncture as well as external risks point to the need for structural reforms that can ease supply constraints and boost inclusive growth. The discussions focused on: 1) short-term demand management policies that would contribute to lowering inflation; 2) policies and reforms that can facilitate investment; and 3) risks in the event of a new full-fledged global crisis.

A. Short-Term Demand Management Policies

15. Continued disinflation is needed and inflation risks are still substantial. RBI and staff analysis suggest that inflation beyond 5-6 percent is associated with lower growth (Box 5). Inflation and inflation volatility also harm investment and may have been an important reason for the decline in the household savings rate in 2010/11. Bringing inflation, particularly non-food inflation, down, can also improve income inequality (see Box 1). But as inflation has become highly persistent, disinflation may require output to remain below potential for an extended period of time. Base effects are expected to persist and keep inflation slightly below the RBI’s end-March projection of 7 percent. This would bring the real repo rate toward its historical average of 1.5-2 percent and broadly in line with the level implied by a standard Taylor rule.3 Nevertheless, given structural pressures on food prices, little or no excess capacity, high nominal wage growth, inflation expectations that have drifted upwards, and the rupee depreciation still to pass through completely, vigilance is required against the possibility that, after base effects wear off, inflation could rise again.

16. Continuing to enhance the monetary policy framework could help anchor inflation expectations. Forward guidance could be provided by the RBI publishing rolling one-year ahead inflation forecasts. The RBI could also give more weight to the CPI in policy formulation over WPI, as household inflation expectations are primarily driven by consumer prices, and also because CPI better reflects households’ consumption patterns.

uA01fig16

Real Policy Rate

(In percent per annum, deflated by WPI)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: CEIC Asia Database; and IMF staff estimates.

17. With consolidation falling short of the 13th Finance Commission’s (FC) roadmap, fiscal policy has not contributed sufficiently to disinflation and appears to be crowding out private spending. The center’s deficit is likely to decline by 0.2 percent of GDP in 2011/12, compared to the FC target of 0.9 percent. The lesser dependence of the states on corporate taxation means they may be less affected, but the slowdown may still push the general government deficit above the forecast 8.1 percent of GDP. Capital spending remains below FC targets, while subsidies have not been contained. Average interest rates on government debt have risen and the announcement in September 2011 of higher government market borrowing caused a jump in long-term interest rates, both indicating that crowding out is occurring, though the RBI’s open market operations aimed at easing liquidity have subsequently lowered yields.

The Output-Inflation Trade-off in India: Implications for Disinflation1

1. The detrimental effects of high inflation on growth are well documented in the literature. For example, Khan and Senhadji (“Threshold Effects in the Relationship between Inflation and Growth,” IMF Working Paper 00/110, 2000) indicate that high inflation hurts growth, and identify different inflation levels for advanced (1-3 percent) and developing economies (7-11 percent) above which inflation begins to hurt growth.

2. Several papers have estimated that inflation beyond 5-6 percent is detrimental to growth in India. Ahluwalia (“Prospects and Policy Challenges in the Twelfth Plan”, Economic and Political Weekly, May 2011) notes that inflation above 6 percent is “regressive and also distortionary, damaging both inclusion and growth”. Mohanty et al. (“Empirical Threshold in India: An Empirical Investigation”, RBI Working Paper 18/2011, 2011) find evidence of an inflation threshold for India in the order of 5.5 percent. Using quarterly data from 1996-2011, we also find evidence that puts the inflation threshold at 5-6 percent for India.

3. Threshold analysis can also be used to shed light on the nature of the inflation-output tradeoff at different levels of inflation. For this, we use a backward-looking Phillips curve (PC) model, and apply quantile regression which allows the estimated slope parameter to differ depending on the level of inflation. We also conduct standard OLS regressions to compare results. The estimated equation is given by:

Qτ(πt)=Σi=1pβi,τπti+γτ(ytyt*)+εt

where γ is the slope of the PC and τ refers to the τ th quantile of the dependent variable (i.e., any particular level of inflation for which γ is to be estimated). Other controls are included, such as real oil prices.

4. The estimated Phillips curves confirm that the tradeoff between inflation and output differs at different levels of inflation. The standard OLS regression shows that a 1 percentage point increase in the output gap leads to a 0.4 percentage point increase in inflation. This implies large disinflation costs; for instance, growth needs to be below potential by 2 percentage points (assuming unchanged potential growth of 7.8 percent) for inflation to drop by 1 percentage point. But more importantly, quantile regression estimates suggest that the cost of disinflation becomes larger at higher levels of inflation. In addition to the changing slope of the PC, inflation becomes more inertial at higher levels. This is consistent with recent anecdotal evidence that wage indexation has become more widespread and survey evidence showing that inflation expectations have become entrenched.

uA01fig17

Impact of output gap and lagged inflation

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

1 Prepared by Roberto Guimarães (APD).
uA01fig18

Government Bond Yields

(In percent per annum)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: Bloomberg Data.

Authorities’ Views

18. The authorities expect inflation to reach the March 2012 projection (7.0 percent), and show some further decline in 2012-13. The authorities believe manufacturing inflation could soften, although momentum indicators remain flat, which along with favorable base effects will bring headline inflation down. The RBI also judges that the pass-through from rupee depreciation has already largely taken place, and notes that below-potential growth in 2012 would reduce firms’ pricing power.

19. The interest rate cycle has peaked, but not yet turned. Tighter policy has successfully eased demand-side pressures and cooled growth, though tightening has been amplified by external shocks. The RBI has clearly stated it has stopped raising policy rates, but whether rates are cut will depend on the future trajectory of inflation, global commodity prices, and the evolving fiscal situation. The RBI notes that in setting its policy rates, it could not yet let its guard down on inflation but balancing growth concerns would also become an important factor.

20. The RBI will continue to base its policy decisions on various price indices. The RBI recognizes the importance of consumer price developments in setting policy. Accordingly, it closely monitors multiple consumer price indices classified on the basis of different economic groups that have been compiled since the early 1950s. However, as the national CPI was introduced only in 2011, the WPI remains the only established national price index. In addition, the higher weight of food in the CPI means its basket is likely to be less responsive to demand-management measures such as monetary policy. Therefore, the RBI will continue to use a multiple-indicator approach, looking at developments in WPI and CPIs, as well as various other indicators of inflation and economic activity.

21. The authorities agree that the 2011/12 budget target is likely to be exceeded. Noting that the buoyancy of indirect taxes was likely to compensate for the reduction in fuel taxation, the authorities anticipate that revenue shortfalls would be minimal. Fertilizer and fuel subsidies have exceeded budget estimates, due to high global commodity prices, but these losses can be contained. The slow pace of fiscal consolidation has added to inflation challenges. Noting that long-term interest rates did not react as strongly to the December 2011 announcement of additional borrowing as they did to the September announcement, the authorities believe that crowding out is not a pressing issue now.

B. How to Revive Investment and Facilitate Inclusive Growth?

22. Implementing structural reforms to revive investment is crucial for ensuring sustainable growth. Persistently high inflation shows that supply constraints are binding. To lessen these constraints and reverse the slowdown, investment must rise. Alternatively, protracted weak investment would initially lower demand, but more worryingly, over time would reduce potential growth. Better infrastructure, more efficient provision of public services, less restrictive labor laws, and a larger manufacturing sector can all stimulate investment. On the other hand, demand management policies can only provide limited impetus to growth, given the high fiscal deficit and the continued need to bring inflation down.

23. To reinvigorate investment, there are some key areas for focus. Staff research shows that there is ample room for India’s business environment to improve, indicating a high potential for structural reforms, and given wide variations across cities, India can learn from itself (see Box 2). Enhancing clarity and predictability of regulations, and accelerating approval processes under such regulations, is vital for reforms to bear tangible fruit. Also, some of these measures are under the states’ purview, and hence states’ regulations and practices would also need to be adjusted. Key reform areas are:

  • Infrastructure, including by simplifying permitting procedures and making contracts more enforceable, facilitating land acquisition and making it more predictable and equitable. Speeding up reforms in the power sector is an urgent priority, particularly through better allocation of domestic coal, bringing state electricity boards’ finances on a sustainable footing, and reforming coal pricing and electricity tariffs.

  • Financial markets, while developing rapidly, still retain important roadblocks to faster growth. Due to the predominance of government securities in financial institutions’ portfolios, both private sector credit and the corporate bond market are small relative to EMs, though less so relative to countries with similar per capital income.

  • India’s labor regulation, which is tighter than in most OECD countries, should move toward protecting workers rather than jobs; improving workers’ skills is another priority (More and Better Jobs in South Asia, World Bank, 2011).

  • Improved agricultural productivity, a focus of the 12th Plan, would reduce structural pressures on food prices. FDI in the multibrand retail sector could also help by making supply chains more efficient.

  • Trade liberalization, an educated work force, access to information flows and technology are all associated with increased sophistication of exports and productivity (see Box 3).

uA01fig19

Private Sector Credit and Corporate Bonds, 2011

(In percent of GDP)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: Banks for International Settlements Statistics; IMF, International Financial Statistics, World Economic Outlook; and CEIC Data Company Ltd.

24. Many of these reforms would pay dividends on inclusiveness. Improved infrastructure would enhance the rural poor’s access to markets. The 12th Plan Approach Paper has identified better irrigation and seeds and removal of controls that inhibit a unified market for agricultural products as priorities to raise agricultural productivity, which would raise rural incomes. Enhanced education would improve job prospects for India’s rapidly growing working age population, while more liberal labor regulation would facilitate job creation in the formal sector.

Authorities’ Views

25. The authorities believe structural issues are not an important cause of the current investment slowdown. They note that other factors, such as monetary tightening, the slowing global economy, and the depreciation of the rupee have damaged sentiment. Progress on policies has been measured, but the government indicates that it is no slower than during 2004-2007, when the economy grew more rapidly.

26. The authorities cite numerous areas where progress on structural reform has been made. Interest rate liberalization has been completed, FDI regulation has been eased, amendments to the law governing the Life Insurance Corporation of India to boost its capital have been approved, the National Manufacturing Strategy has been proposed with the aim to increase the share of manufacturing, and the Land Acquisition and Mining Laws, which should facilitate infrastructure building, have been submitted to Parliament. On the crucial energy sector, lending to state electricity boards has been conditioned on raising tariffs (which some states have done) and reducing transmission and distribution losses.

27. The government will push forward with further measures in 2012/13. The 2012/13 Budget is expected to reduce investment roadblocks, particularly in areas such as infrastructure and agriculture. Negotiations related to the GST are ongoing, and recent progress bodes well. The authorities plan to address other areas, such as the need to reduce skills mismatches and improve agricultural productivity, in the 12th Plan. Finally, the authorities noted that broadening the benefits of economic reform will be a priority under the 12th Plan.

Financial Stability and Reform

28. The FSAP concluded that the financial system is broadly stable but some areas could be strengthened (see accompanying FSSA). India’s financial system has developed rapidly in recent years and capital ratios as well as return on assets are adequate. However, non performing assets (NPAs) rose 30 percent in the year to September 2011 to 2.8 percent of total advances (partly reflecting problems in priority lending, infrastructure, and accounts restructured during the GFC), provision coverage remains low, and hybrid structures account for a relatively high proportion of capital. The authorities have moved to tie public bank recapitalization to improved performance, and increased inter-regulatory information sharing. However, an important risk is that concentration limits are considerably less stringent than international good practice. Increased oversight of corporate risks (including FX open positions) and stronger consolidated supervision by lead regulators are warranted. Granting greater powers to supervisors would also help resolve nonviable financial entities.

29. Enhancing infrastructure financing is a key area of focus for financial sector development.4 Public banks’ lending cannot keep pace with rising needs without raising sectoral and group exposures and asset-liability mismatches to imprudent levels, which underscores the need to diversify funding sources beyond banks. In recent years, the authorities have taken steps to channel more savings into infrastructure. They have raised limits on foreign investment (FII) in bonds and enabled infrastructure finance companies to buy seasoned infrastructure loans and borrow abroad. Uptake on many of these measures has been low, however, reflecting nonfinancial and scheme design issues, and insufficient bond market liquidity.

30. Continued reforms to fixed-income markets, especially the development of the corporate bond market, would facilitate funding for infrastructure and large projects. Lowering mandatory bank holdings of public debt (the statutory liquidity ratio, SLR), encouraging banks to trade bonds (e.g. by increasing the share of bonds that must be marked to market) and relaxing restrictions on repo collateral and CDS while continuing to raise FII debt limits would increase liquidity and facilitate the development of a yield curve for pricing corporate bonds. Easing investment guidelines for domestic institutional investors, and relaxing restrictions on credit enhancements would increase demand for corporate bonds. Approving the Pension Fund Regulatory and Development Agency (PFRDA) bill would give impetus to the pension fund industry and promote long-term investments. Improving the insolvency regime, increasing investor protection, and continuing to develop instruments to hedge interest rate risk would also help.

31. Broadening the reach of the financial system can support inclusive growth. Easing regulations that raise the cost for banks to operate in underserved areas and allowing a greater role for business correspondents is needed to extend banking services to the unbanked. Greater SME financing requires larger corporates shifting to capital markets and more effective contract enforceability.

Authorities’ Views

32. The authorities view the FSAP as a useful and collaborative exercise that complements their 2008 Financial Self-Assessment. The broad assessment of financial sector’s stability and deepening since 2001 agreed with that of the Self-Assessment. The authorities concur that in areas such as bank resolution, enhancement of lateral bank supervision and information-sharing, there is room for improvement, and measures are already being taken. On the other hand, the RBI believes that concentration risks can be adequately addressed through sectoral and group limits that are already in place, and that the recent rise in NPAs is transitory and compares favorably with peer emerging market economies.

33. The authorities are also confident about their strategy for financial development. The authorities note that five companies have requested licenses to open infrastructure debt funds and that issuance of tax-free infrastructure bonds has been facilitated. The authorities also agree that enhancing borrowing opportunities for SMEs will require further development of the corporate bond market, noting that reducing lock-in periods and allowing the transfer of bond holding ceilings along with bond sales should improve liquidity. Several measures such as monitoring unhedged foreign currency exposure and limits to underlying exposure of corporate to derivatives have been taken to limit corporate risk exposure. Finally, financial inclusion remains a strong priority and measures to extend the reach of financial services are being undertaken through regulatory incentives and use of technology with a view toward profitability, thus ensuring banks will stay in these markets for the long run.

Fiscal Reform

34. Fiscal consolidation and reforms are essential complements to structural reforms. The FC roadmap would reduce the public sector’s absorption of resources, thus stimulating private investment. GST reform is expected to create a unified market across India, while reorienting spending to infrastructure and social sectors is critical to ease supply constraints, make growth more inclusive, and reduce skill mismatches.

uA01fig20

Alternate Scenarios for Central Government Deficit

(IMF definition, in percent of GDP)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Source: IMF Staff estimates.1/ Implementation of FSA, central govt. capital spending at 2.5 percent of GDP, increases in health spending under 12th Plan.

35. Reducing the deficit would allow relaxation of financial restrictions currently employed to ensure the government’s access to sufficiently low-cost finance.5 The SLR requires banks to hold 24 percent of deposits in government or other approved securities, and pension and insurance funds are also subject to tight investment guidelines. This large flow of long-term, low-risk assets has discouraged private sector long-term lending and, when combined with capital controls, has allowed India to finance persistent budget deficits at stable and relatively low costs. The authorities have gradually eased financial restrictions—savings deposit rates have been freed, capital controls eased, and the SLR reduced. Nevertheless, a lower deficit would allow these restrictions to be loosened further, supporting development of the corporate and public bond markets, allowing the financial system to allocate capital to more productive areas, lowering the cost of finance for private borrowers, and supporting growth.

36. The medium-term FC target is broadly consistent with a budget deficit “Golden Rule”. To reach 9 percent growth, the 12th Plan Approach Paper calls for public investment of 9-10 percent of GDP, half of which would need to be spent by the central and state governments. The FC target of a 5 percent of GDP deficit for the general government would thus entail government borrowing almost exclusively for investment purposes. Over five years, freeing diesel prices and reforming other subsidies could close about two-thirds of the gap with the baseline scenario, while bringing indirect taxes back to pre-crisis levels would close the rest.

37. The approval of long-delayed tax reforms would have positive growth effects. Both the GST and the new Direct Tax Code (DTC) are still being negotiated. However, the central government’s broadening of the base of indirect taxation to approximate the eventual GST base and the recent important agreement on the services list for the GST show that progress is being made. The FC estimated that the GST would boost efficiency by 1½ percent of GDP.

38. Expenditure reforms, which the government has repeatedly committed to, are vital to ensure medium-term fiscal consolidation. The government is aiming to boost spending on public investment, health, and food subsidies, while containing non-priority expenditure. Subsidies have been an important exception to an otherwise relatively successful containment of non-priority spending, while slowing growth and rising expectations for social spending will make maintaining budget discipline even more difficult. Liberalization of fuel prices, especially diesel, and rationalization of fertilizer and gas subsidies will be crucial to bringing the deficit down, though support for the most vulnerable must be ensured. Institutional reforms such as tighter escape clauses from the Fiscal Responsibility Act and an independent review mechanism for fiscal policy, as proposed by the FC, would help implementation. Recapitalization of public banks, which constitute about ¾ of the overall system, guarantees of public insurance policies, and India’s growing PPP program, will require more consistent forecasting of potential government outlays (Box 6). Finally, the poor financial position of several state electricity boards should be resolved with tariff changes and improvements in efficiency.

39. Improving spending efficiency will be particularly important. India’s Unique Identification program (UID), already the world’s largest biometric database, is expected to cover one-third of the country’s population – 400 million people – by end-2012. Pilot projects using the UID to target social benefits have begun and could represent an important step in broadening the reach of government programs at lower cost.

Authorities’ Views

40. Fiscal consolidation is well underway and medium-term targets will be met. The debt-to-GDP ratio is in within easy reach of the FC target of 68 percent of GDP by 2014-15. The authorities note that the deficit consolidation path is frontloaded, and that there will be space in the remainder of the FC period to reach the medium-term target of a 3 percent of GDP budget deficit for the central government.

41. The authorities note various structural measures to improve the implementation of fiscal policy. The 12th Plan will make improvement of expenditure efficiency a priority and the UID will pave the way for direct cash transfers. Bringing down fuel and fertilizer subsidies is important, but will have to be done cautiously to minimize dislocations

Accounting for Contingent Liabilities from PPPs1

1. India’s increasing use of PPPs for infrastructure creates new liabilities. Private finance for infrastructure was US$51 billion in 2010/11, or around 2.8 percent of GDP, but the 12th Plan is expected to call for it to rise to 5 percent of GDP. India’s PPP program, at US$129 billion already one of the world’s largest, could thus grow rapidly. However, PPPs create contingent liabilities, such as annuities or termination payments or the need to finish a desired program after an investor goes bankrupt.

2. These risks should be presented transparently. Some countries, such as the United States, require contingent liabilities such as public guarantees to be incorporated into the budget; the United Kingdom also does this with PPPs. Chile annually presents all contingent public liabilities, including PPPs, calculating both a maximum cost to the government if all guarantees are called (in 2010, around 4 percent of GDP) as well as a probability-based estimate of expected outflow (only around 1/10,000 of GDP).

Figure 1
Figure 1

India: Maximum Contingent Liabilities for Existing PPP Projects

(Billions of Rupees)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Figure 2
Figure 2

Expected Value and 95 Percent Upper Bound for Annual Losses from PPP Projects

(Billions of Rupees)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

3. Estimates for India’s PPP portfolio can also be produced, though data are sparse. We make simplifying assumptions of project duration and the time remaining on each contract, and also assume construction liabilities are capped at project cost, while operating income is related to construction cost and prorated for contracts that can last up to 30 years. Assuming default probabilities approximately comparable to S&P ratings of BB (for construction) and BBB- (for operation), we find relatively small exposures. Maximum exposure drops drastically from a peak of around 0.3 percent of GDP as projects currently under construction come online and reduce potential losses (Figure 1). As for the risk weighted measure, with 95 percent probability losses remain under Rs 20 billion, or 0.02 percent of GDP. However, different assumptions could produce different results. More accurate calculations, based on the deeper database of information available to the authorities, would be worthwhile, especially as these programs expand.

1 Prepared by James P. Walsh (APD).

C. Risks: How Much of a Threat to India are the Advanced Economies’ Troubles?

42. Risk analysis suggests that India is vulnerable to a prolonged malaise in advanced economies. Though India is less open than most Asian EMs, the confidence and financial effects of a protracted downturn in advanced economies could have a sizable impact on India’s growth (Annex 1). As shown during the GFC, while India’s consumption is fairly insulated from global factors and imports typically compress sharply when a crisis hits, India’s investment has become highly correlated with the global cycle. This suggests that the financial and confidence channels tend to dominate the trade channel in the transmission of external shocks.

uA01fig21

Global GDP and Capital Formation

(percent year-over-year)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

43. Euro zone banks account for about a third of BIS banks’ claims on India and their deleveraging could have a material impact, particularly if global banks are severely affected. Euro zone banks’ claims on India amount to 3.2 percent of India’s GDP; UK banks have 4.2 percent and US banks 3.6 percent. Given foreign banks’ small retail presence in India, BIS-reporting banks’ claims on India are mostly cross-border and short term, exacerbating vulnerabilities. Also, European banks are important providers of trade credit and major players in FX derivatives markets. Global banks so far are reducing their claims slowly and are being replaced by other banks, especially from the region, though compensating for a sharp and abrupt deleveraging might not be easy. Domestic banks, especially public banks which would likely benefit from deposit flight, could also help replace foreign financing.

uA01fig22

Exchange Rates

(Index 2005=100)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Source: IMF, APDCORE.
uA01fig23

External Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: IMF, World Economic Outlook.

44. External stability risks are currently manageable but could intensify appreciably in a severe global crisis. The current account deficit is expected to remain close to its estimated norm of 3 percent of GDP (Figure 4). Exports have continued to gain market share, and capital goods account for the majority of non-oil imports. The real effective exchange rate (REER) had appreciated by 10 percent in 2010 because of inflation differentials, but with the nominal depreciation in 2011, the REER is estimated to be broadly in line with fundamentals. Reserve coverage is adequate (1.8 times the 2011 gross external financing requirement) and external debt, which has remained at about 20 percent of GDP, compares well to other major EMs. But as seen in the second half of 2011, spikes in global risk aversion lead to a larger rupee depreciation than for other regional currencies, because India’s current account deficit is increasingly financed by external commercial borrowing and portfolio investment and hence is more vulnerable to sudden stops of capital inflows.

Figure 4.
Figure 4.

India: External Vulnerability

External vulnerabilities have increased but remain manageable.

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: CEIC Database; Haver Analytics; Markit; and IMF staff estimates.

45. Corporates constitute an important channel of contagion. They have higher leverage than their EM peers and are freer to take FX positions as capital controls on them are less stringent than on financial institutions and individuals. During the GFC, as U.S. dollar liquidity dried up, many Indian multinationals resorted to onshore borrowing, adding to domestic strains and leading to a spike in money market rates. Also, many suffered losses as a result of exchange rate depreciation. As India combines low household incomes with large and sophisticated firms, bank balance sheets are dominated by corporate lending, resulting in high concentration risks, a concern noted in the FSAP. A significant deterioration in asset quality could result from a crisis, and public banks, which have lower levels of capital and provisioning, could be particularly affected.

46. If downside risks materialize, monetary policy can move first, followed by carefully designed fiscal measures. Monetary policy can provide immediate relief through liquidity provision, which the RBI has already started doing in recent months, and interest rate cuts, especially if the global shock is accompanied by lower oil prices, which will reduce inflationary pressures. Fiscal measures could also help, but should be taken cautiously as expansionary measures are difficult to reverse, as shown after the GFC. Available fiscal space will depend on how much progress is made on fiscal consolidation before a crisis hits. At current levels of the fiscal deficit and debt, the fiscal room would be small.

uA01fig24

CDS and Cost of Funding

(In percent per annum, five day moving average)

Citation: IMF Staff Country Reports 2012, 096; 10.5089/9781475503081.002.A001

Sources: Bloomberg; and IMF staff estimates.1/ Implied by three-month FX forwards.

47. The flexibility of the exchange rate remains a useful buffer against external shocks. Since the GFC and until August 2011, RBI intervention was minimal, and recent interventions have fallen within the RBI’s stated policy of intervening only to address severe market dislocations and foreign exchange liquidity shortages. Recent measures by the RBI to restrict banks’ net foreign exchange (FX) open positions and corporates’ ability to trade in the onshore forward market seem to have contributed to stabilizing the rupee. The authorities have continued to gradually liberalize capital flows, such as by freeing interest rates on nonresident accounts, facilitating the refinancing of external debt, and allowing foreign individuals to invest in equities directly. Consideration could also be given to increasing the all-in cost spreads on external commercial borrowing to further ease external financing constraints.

Authorities’ Views

48. The authorities agree that difficulties in advanced economies pose serious risks, but underscore India’s resilience. Both trade and financial channels could be important in a crisis, though recent trade diversification should mitigate the impact and the main sources of India’s growth are domestic. The authorities feel the managed capital account and Indian banks’ minimal exposure to Euro zone assets would limit financial spillovers. While the recent depreciation has been comparable to that experienced during the GFC, high oil prices have offset the impact on the current account.

49. While noting that fiscal space is more constrained than in 2008, the authorities emphasize that a crisis response will need to be a coordinated event. Actions by both the RBI and the government would be warranted. They also cite reserves as a line of defense while standing by the floating exchange rate regime. The RBI believes FX intervention will remain justified to smooth volatility or to address severe FX liquidity shortages.

STAFF APPRAISAL

50. India’s growth has slowed due to cyclical and structural factors. Supply constraints, rising funding costs, and the external environment have pulled growth down below trend in 2011/12, though not yet sufficiently for sustained disinflation. While still high relative to other EMs, bringing Indian growth back to potential and ensuring its inclusiveness will require continued vigilance on cyclical policies and a reinvigoration of the structural agenda.

51. Growth risks are on the downside. The main domestic risks stem from the pace of structural reform implementation and government decision making, and continued high inflation, while the highly uncertain global outlook also weighs on investment and exports.

52. Given decelerating but still high inflation, keeping policy rates unchanged until inflation is clearly on a downward trend is warranted. Since most of the recent decline in inflation is due to base effects, cutting rates immediately would be premature. Looking beyond March when base effects end, the RBI should stand ready to raise rates if sequential inflation rises again, while it could afford to cut rates if the inflation momentum clearly eases. Over the medium term, the RBI is rightly aiming at lowering inflation further to below 5 percent.

53. Fiscal policy should stay the course of medium-term consolidation, resisting pressures to introduce a demand stimulus. The FC’s medium-term roadmap remains appropriate. The 2011/12 budget slippage may entail a more gradual return to the path, but reconstituting fiscal space is a worthwhile goal in light of heightened external risks. Fiscal consolidation would have positive spillover effects on private sector growth by reducing the public sector’s absorption of resources and allowing the existing financial restrictions to be removed gradually. Fiscal reforms are preferable to demand stimulus for reviving investment. In particular, reorienting expenditure toward capital and social spending as envisaged by the authorities is welcome as it can boost investment and promote inclusive growth. Decontrolling diesel prices, rationalizing other fuel and fertilizer subsidies, and moving toward direct cash transfer under UID are essential to keep deficits under control and free space for more growth-enhancing spending. Approval of the GST should also be a priority.

54. The revival of growth should come from structural reforms, rather than from monetary and fiscal stimulus. Structural impediments, some of which have intensified in recent years, are important contributors to India’s investment slowdown. Removing obstacles to investment is crucial, especially in energy, where a broad range of factors are at play. Beyond this, passing legislation to facilitate land acquisition and mining would promote infrastructure provision and ensure that India’s high growth potential remains intact. Financial reforms are needed to increase corporate and household access to credit and diversify funding sources. On the other hand, given the large fiscal deficit and elevated inflation, fiscal and monetary policy cannot be relied upon to stimulate investment and growth.

55. Such reforms would also make growth more inclusive. Addressing skill mismatches, moving toward a more liberalized labor market, and improving agricultural productivity will support income growth and formal job creation, especially for the less privileged in society.

56. While India’s financial system is broadly stable, there is room to guard against future instability and further develop markets. Measures to increase and improve the quality of bank capital are welcome, along with improving interregulatory cooperation and clarifying supervisory responsibilities. On the developmental front, continuing to develop fixed income markets will be essential to achieve infrastructure goals, which in turn will require reducing financial restrictions over time as fiscal consolidation progresses. Given concerns about the global environment, improvements to the resolution regime, increasing oversight of corporate risks, and addressing group concentration risks in the banking sector are important.

57.A slowdown in global growth, particularly if triggered by a sudden stop in capital flows, would have a serious impact on India. Investment is increasingly tied to global cycles, corporates are relatively highly leveraged, and the external position, while quite manageable, is less favorable than during 2008. The resulting growth downturn could also lead to a substantial deterioration in asset quality in the financial system.

58. In the event of a crisis, the flexible rupee would be an important buffer, while the scope for fiscal and monetary stimulus is more limited than in 2008. The RBI’s foreign exchange market policies appropriately limit intervention to extreme situations. The authorities’ moves toward further gradual external liberalization are also welcome. In the event of a crisis, high debt and deficits point to the need to ensure a prospective fiscal expansion would be limited and focused on high-multiplier items such as indirect taxes and backlogged capital projects. Monetary policy could be eased, though the extent of easing will depend on trends in domestic inflation.

59. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.

India: Millennium Development Goals, 1990-2010 1/

article image
Source: World Bank, World Development Indicators, 2011.

In some cases the data are for earlier or later years than those stated.

Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day.

Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling.

Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels of education no later than 2015.

Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate.

Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio.

Have halted by 2015, and begun to reverse, the spread of HIV/AIDS. Have halted by 2015, and begun to

Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. Halve, by 2015, the proportion of people without sustainable access to safe drinking water. By 2020, to have achieved a significant improvement in the lives of at

Develop further an open, rule-based, predictable, non-discriminatory trading and financial system. Address the Special Needs of the Least Developed Countries. Address the Special Needs of landlocked countries and small island developing states. Deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term. In cooperation with developing countries, develop and implement strategies for decent and productive work for youth. In cooperation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries. In cooperation with the private sector, make available the benefits of new technologies, especially information and communications.

Table 2.

India: Selected Economic Indicators, 2007/08–2012/13 1/

article image
Sources: Data provided by the Indian authorities; CEIC Data Company Ltd; Bloomberg L.P.; World Development Indicators; and IMF staff estimates and projections.

Data are for April-March fiscal years.

Differs from official data, calculated with gross investment and current account. Gross investment includes errors and omissions.

Divestment and license auction proceeds treated as below-the-line financing. Subsidy related bond issuance classified as expenditure.

Includes combined domestic liabilities of the center and the states, inclusive of MSS bonds, and external debt at year-end exchange rates.

For 2011/12, as of October 2011.

For 2011/12, as of October 2011.

On balance of payments basis.

Imports of goods and services projected over the following twelve months.

Short-term debt on residual maturity basis, including estimated short-term NRI deposits on residual maturity basis.

In percent of current account receipts excluding grants.

Table 3.

India: Balance of Payments, 2007/08-2012/13 1/

(In billions of U.S. dollars)

article image
Sources: CEIC Data Company Ltd; and IMF staff estimates and projections.

Data are for April-March fiscal years. Indian authorities’ presentation.

Net other capital is sum of net banking capital (RBI format) and net other capital (RBI format) less net NRI deposits.

Calculated as difference between the stock of reserves and the overall balance of BOP.

Table 4.

India: Macroeconomic Framework, 2007/08-2015/16 1/

article image
Sources: Data provided by the Indian authorities; CEIC Data Company Ltd; and IMF staff estimates and projections.

Data are for April-March fiscal years unless otherwise mentioned. Calendar year data in 2008/09 column indicate data for 2008, for instance.

Differs from official data, calculated with gross investment and current account.

Statistical discrepancy adjusted.

Divestment and license auction proceeds are treated as financing; includes subsidy related bond issuance.

Includes combined domestic liabilities of the center and the states, inclusive of MSS bonds, and sovereign external debt at year-end exchange rates.

Imports of goods and services projected over the following twelve months.

Including short-term debt on contracted maturity basis, all NRI deposits, and medium and long-term debt on residual maturity basis, different from authority’s definition.

Table 5.

India: Central Government Operations, 2007/08–2012/13 1/

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Sources: Data provided by the Indian authorities; and Fund staff estimates and projections.

Data for April - March fiscal years.

Budgeted deficit was 5.6 percent of GDP under IMF definition; 5.1 percent under authorities’ definition.

In 2007/08, includes a special dividend payment from the RBI amounting to 0.7 percent of GDP. The authorities include this item under “other capital receipts” rather than non-tax revenue. In 2010/11 excludes 3G receipts, classified under divestment receipts.

Includes the surcharge on Union duties transferred to the National Calamity Contingency Fund.

Excludes subsidy-related bond issuance.

In 2007/08, includes roughly 0.7 percent of GDP for the government’s purchase of SBI shares from the RBI.

Treats divestment as a revenue item until 2005/06 and after 2009/10 (included). In 2008/09, authorities treat proceeds from selling shares vested with SUTI as revenue in the Budget.

Treats divestment receipts as a below-the-line financing item. Includes subsidy-related bond issuance as expenditure.

Issued by the central government to the Food Corporation of India, fertilizer producers, and the state-owned oil refining/distribution companies as compensation for losses incurred from the subsidized provision of commodities.

External debt measured at historical exchange rates. Inclusive of MSS bonds.