The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with India on February 13, 2015.
India’s near-term growth outlook has improved, and the balance of risks is now more favorable, helped by increased political certainty, several positive policy actions, improved business confidence, and reduced external vulnerabilities. In response to the balance of payments pressures during the post-May 22, 2013 taper tantrum period, and against the background of still-limited policy space, the Indian authorities have maintained pro-cyclical fiscal and monetary policy stances. Consequently, India’s vulnerabilities have receded more than those of most emerging markets and sentiment has been revived, with growth rebounding to 5.5 percent in the first half of fiscal year (FY) 2014/15 (ending in March), and the recovery strengthening gradually. Furthermore, CPI inflation has declined from 9.5 percent in FY 2013/14 to 5 percent in December 2014, reflecting economic slack, a tight monetary stance, lower global commodity prices, government efforts to contain food inflation, and favorable base effects. Robust capital inflows in conjunction with the sharp current account deficit correction (largely due to the contraction in gold imports) have provided for an increase in international reserves of about $30 billion over the last year, reaching US$320 billion (representing about 6½ months of import coverage) at end-December 2014.
Growth is projected at 5.6 percent for FY 2014/15, picking up to 6.3 percent in FY 2015/16 (at factor cost), as a result of the revival in industrial and investment activity. However, weaknesses in India’s corporate and bank balance sheets will weigh on credit growth, and fiscal restraint and a tight monetary stance will act as headwinds in the near term, offsetting the positive growth impact of the improved commodity terms of trade. CPI inflation is projected to move up to about 6¼ percent by March 2015 and hover slightly above 6 percent over the course of FY 2015/16, as growth picks up, slack dissipates, and favorable base effects unwind. The current account deficit is expected to remain contained at around 1¾ percent of GDP in FY 2015/16, helped by significantly lower oil import prices, shrinking gold imports, and rebounding exports.
Despite the reduction in India’s external imbalances and strengthening of buffers, the spillover impact from global financial market volatility to India could be very disruptive, including from any unexpected developments in the course of U.S. monetary policy normalization, particularly against the backdrop of recent large capital inflows. External risks also emanate from a prolonged period of weak global growth, which could dampen Indian exports. Domestic risks include a supply-driven spike in inflation, further deterioration in bank asset quality and continued stress in corporate financial positions, as well as slower-than-expected progress in addressing supply-side bottlenecks, which could weigh on growth and stoke inflation. On the upside, expedited structural reforms and faster implementation of cleared investment projects could lead to stronger growth, as would sustained low global energy prices.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.