The Indian economy is on a recovery path, helped by a large terms of trade gain, positive policy actions, improved confidence, and reduced external vulnerabilities. A faster-than-expected decline in inflation created space for nominal policy rate cuts. Persistently high inflation expectations and large fiscal deficits remain key macroeconomic challenges, resulting in limited policy space to support growth through demand management measures. In addition, supply bottlenecks and structural challenges constrain medium-term growth and hinder job creation. Risks are weighted to the downside, with external risks mainly from intensified global financial market volatility and slower global growth. On the domestic side, a further weakening of bank and corporate balance sheets could pose risks to economic recovery and weigh on financial stability, while setbacks in the pace of structural reforms could dampen growth and undermine sentiment. In contrast, lower-for-longer global energy prices constitute an upside risk for India.

Abstract

The Indian economy is on a recovery path, helped by a large terms of trade gain, positive policy actions, improved confidence, and reduced external vulnerabilities. A faster-than-expected decline in inflation created space for nominal policy rate cuts. Persistently high inflation expectations and large fiscal deficits remain key macroeconomic challenges, resulting in limited policy space to support growth through demand management measures. In addition, supply bottlenecks and structural challenges constrain medium-term growth and hinder job creation. Risks are weighted to the downside, with external risks mainly from intensified global financial market volatility and slower global growth. On the domestic side, a further weakening of bank and corporate balance sheets could pose risks to economic recovery and weigh on financial stability, while setbacks in the pace of structural reforms could dampen growth and undermine sentiment. In contrast, lower-for-longer global energy prices constitute an upside risk for India.

Fund Relations

(As of December 31, 2015)

Membership Status:

Joined December 27, 1945; Article VIII.

General Resources Account

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SDR Department:

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Outstanding Purchases and Loans: None

Financial Arrangements:

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Projected Payments to Fund

(SDR million; based on existing use of resources and present holdings of SDRs):

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Exchange Rate Arrangement:

As per the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), the exchange rate in India is classified as floating. The exchange rate of the rupee is determined in the interbank market, where the Reserve Bank of India (RBI) intervenes at times. The RBI’s role is to modulate excessive volatility so as to maintain orderly conditions. 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 nontransferability 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.

Article IV Consultation:

The previous Article IV consultation discussions were held in December 2014. The Staff Report (IMF Country Report No. 15/61) and associated Selected Issues (IMF Country Report No. 15/62) were discussed by the Executive Board on February 13, 2015.

FSAP Participation and ROSCs:

The pilot FSSA/FSAP report was issued in January 2001; a fiscal transparency ROSC was issued in February 2001 (http://www.imf.org/external/np/rosc/ind/fiscal.htm); the data model of the ROSC (Country Report No. 04/96) was issued in April 2004. The missions for the FSAP Update took place in 2011, and concluding meetings were held in Delhi and Mumbai in January 2012—the FSSA Update report was published in January 2013 (Country Report No. 13/8). Detailed assessment reports on FSAP-related papers were issued in August 2013 and published as Country Reports No. 13/265–268.

Technical Assistance:

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Outreach and Other Activities:

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Resident Representative:

A resident representative’s office was opened in November 1991. Mr. Thomas Richardson has been the Senior Resident Representative since August 2012.

Relations with the World Bank Group

In Bank FY15 (July 1, 2014–June 30, 2015), IBRD/IDA lending in India totaled US$3.8 billion (of which US$2.1 billion IBRD and US$1.7 billion IDA). IFC committed US$1.3 billion in FY15. The World Bank Group’s (WBG) Country Partnership Strategy (CPS) for India for 2013-20171 focuses on helping India accelerate poverty reduction and boost shared prosperity, and is closely aligned the Government’s 12th Five-Year Plan, and its goal of “faster, sustainable, and more inclusive growth.” To make a meaningful contribution to India’s many development challenges, the volume of WBG support—from IBRD, IDA, and IFC—should reach $4 billion annually over the five-year period of the CPS.

Under the Strategy, the WBG aims to contribute to India’s development by deepening and strengthening engagement in three priority areas: integration, rural-urban transformation and inclusion. “Integration” seeks to increase market integration by focusing on addressing infrastructure gaps and investment climate as key measures needed to help low-income states converge more quickly with their faster-growing neighbors. With 600 million people expected to live in India’s cities by 2031, “rural-urban transformation” will require intensified engagement to improve the management and livability of medium-sized cities. “Inclusion” will entail a stronger focus on human development with improvements in healthcare systems and nutrition, on the quality of education at all levels, as well as on better access to finance and social protection for the underprivileged. A common theme across these three areas of engagement will be an emphasis on improved governance, sustainability, and gender equality.

Two key strategic shifts are central to the WBG program in India: increased support to 14 low-income and special category states2 and to urbanization. The Bank is working with the Government to rebalance its lending portfolio, so that 30 percent of all IBRD/IDA lending will be directed to these states, which together account for 61.5 percent of India’s 270 million people living in poverty. Many of these states also have human development indicators—high infant mortality, high child malnutrition, low female literacy—on par with the poorest countries in the world. IFC’s LIS investment portfolio covers a broad range of sectors, complemented its advisory services. Engagement in more advanced states and at the central level will focus on activities that are transformative and innovative. Urbanization presents tremendous opportunities, both for agriculture and poverty reduction, and competitiveness. WBG support focuses on government efforts at the national, state and city levels to help improve the livability of medium-sized cities.

A robust knowledge portfolio complements and underpins financing and includes: (i) focus on in-depth analytical work on key cross-sectoral questions; (ii) inform design and implementation of future interventions by drawing on impact evaluations; (iii) respond quickly and flexibly with demand-driven technical assistance and just-in-time knowledge support to help reform and implementation; (iv) broker South-South and across-state knowledge exchanges; (v) develop flexible programmatic approaches to develop analytic and advisory activities; and (vi) scale-up training capacity. The Advisory Services and Analytical (ASA) program has been strategically realigned to enhance the implementation of the CPS and its contribution to the twin goals of poverty reduction and shared prosperity. A clustered approach enables WBG teams to work on multi-sectoral development challenges in areas such as poverty and shared prosperity, water, urban, service delivery, human development outcomes, public-private partnerships, social inclusion and gender and economic integration.

The India Performance and Learning Review (PLR)3—the mid-term assessment of the Strategy—noted that the India program has been scaled up over the last three years and is being delivered in the context of a strengthened partnership between the Government of India and WBG. The 2014 National Elections brought to power the National Democratic Alliance (NDA), led by Prime Minister Narendra Modi. Stressing the importance of WBG as the “Knowledge Bank”, Prime Minister Modi and President Jim Kim agreed to scale up support in six strategic priority areas of engagement. Cutting-edge, global knowledge and financing is being mobilized from across the “One World Bank Group” to help: rejuvenate the Ganga; develop smart cities and improve urban service delivery; improve rural sanitation and end open defecation; provide 24/7 electricity to all, including an ambitious push on solar energy; and provide youth with training and skills development. The Bank Group will also scale up engagement to help modernize India’s massive railway system and improve India’s business climate. In the remainder of the CPS period more emphasis will also be placed on addressing India’s high malnutrition rates and helping to create opportunities for greater economic and social inclusion of people belonging to Scheduled Castes and Scheduled Tribes and women.

India: World Bank Financial Operations

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Source: World Bank.

On an Indian fiscal year basis beginning April 1.

April 1, 2014 through March 31, 2015.

Based on loan approval date.

Relations With the Asian Development Bank

The Asian Development Bank (AsDB) operations in India began in 1986. Cumulative public sector loan commitments totaled $31.9 billion as of 30 September 2015 for 192 loans. With an additional $3.0 billion in private sector loans (the latter without government guarantee), total loan commitments on a cumulative basis amount to $34.9 billion. These funds have been provided from AsDB’s ordinary capital resources (OCR). Also, AsDB has approved equity investments amounting to $0.5 billion. AsDB’s lending and equity activities are summarized below.

India: Asian Development Bank Financial Operations (sovereign and non-sovereign)

(In millions of U.S. dollars, as of 30 September 2015)

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Source: Asian Development Bank.

As of 30 September 2015.

AsDB’s India Country Partnership Strategy (2013–2017) (CPS) is based on three strategic pillars: (i) inclusive growth; (ii) environmental sustainability; and (iii) regional cooperation and integration. The CPS is anchored to AsDB’s Strategy 2020 and has been designed to support the Government of India’s 12th Five Year Plan (2012–2017) vision of faster, more inclusive, and sustainable growth. The CPS emphasizes robust infrastructure development, job creation and access to jobs, regional connectivity, and environmental sustainability. The backbone of the India program will be energy, transport, and urban services. On a selective basis, ADB will also invest in special purpose vehicles for infrastructure financing, water resources management, skills development, and state-level fiscal reforms.

Statistical Issues

1. Macroeconomic statistics are adequate for surveillance, but weaknesses remain in the timeliness and coverage of certain statistical series. India has an intricate system for compiling economic and financial statistics and produces a vast quantity of data covering most sectors of the economy. India subscribed to the Special Data Dissemination Standards (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 and employment statistics: In January 2015 the Central Statistical Office (CSO) released a new series of national accounts, with base year 2011/12. In addition to the shift in the base year for measuring growth, the revisions reflected a review of source data and compilation methods, and implementation of 2008 SNA. Due to weaknesses in estimating taxes less subsidies on products in constant prices and as supply-side data remain of better quality than expenditure-side data, Gross Value Added is preferred as a proxy for measuring economic growth. For current price estimates, the data sources provide adequate coverage of economic activities, and the methodology is broadly consistent with international standards and best practices. Nonetheless, a sales-tax-based extrapolation of trade turnover value from the base year does not provide an accurate gauge of growth of economy-wide value added from trade. Constant price estimates of GDP deviate from the conceptual requirements of the national accounts, in part because the Wholesale Price Index (WPI) is used to derive volume estimates for many economic activities. The WPI is not the price counterpart for GDP by type of activity because the WPI includes some product taxes whereas GDP by activity does not include product taxes. Therefore, the WPI can be influenced by changes in tax rates. Further, the WPI weights include imports but the prices for the index are collected only on domestic goods. Large revisions to historical series, the relatively short time span of the revised series, and major discrepancies between GDP by activity and GDP by expenditure complicate analysis. There are long-standing deficiencies in employment data: they only cover the formal sector, which accounts for a small segment of the labor market, and are available only with a substantial lag.

4. Price statistics: A revised all-India Consumer Price Index (CPI) with new weights was released in early 2011, which covers combined rural and urban India, with 2009/10 as a base year. As well, separate corresponding urban and rural CPI series are published. The CPIs are published with a lag of about one month. In early 2015, the CPI weights were updated using 2011/12 expenditure data and the CPI series has been revised from January 2015. Since January 2006, the Labour Bureau has published a CPI for industrial workers with a 2001 base year. Presently, there also remain four CPIs, each based on the consumption basket of a narrow category of consumers (namely industrial workers, urban and non-manual employees, agricultural laborers, and rural laborers). With the exception of the industrial workers CPI, these other indices are based on weights that are over ten years old. The WPI has a 2004/05 base year, for which data are also subject to frequent and large revision, usually upward. A new series of the WPI, also using 2011/12 base year, are likely to be released in March 2016. The authorities have been encouraged to develop a Producer Price Index to replace the WPI. New RBI price series on residential property price indexes have helped surveillance in this area, though geographic coverage remains limited, and price data for commercial real estate are not available. The RBI has started producing a series covering rural wage data, which helps surveillance, but economy-wide wage data are scant.

5. External sector statistics: The concepts and definitions used to compile balance of payments statistics are broadly in line with the sixth edition of the Balance of Payments Manual (BPM6). However, 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. 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 BPM6 and these data are disseminated within six months of the reference period in respect of annual data.4 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. 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 web site.

6. Monetary and financial statistics: The RBI web site 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. In 2011, the RBI started publishing a weighted average lending interest rate and other lending rates at annual frequency. 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 was 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. Government finance statistics: The Ministry of Finance (MoF) is responsible for compiling and disseminating the GFS. India reports the budgetary central government cash flow statement within one month after the reference month and stock of liabilities within one quarter after the reference quarter. With the agreement of the authorities, STA uses these data to compile a monthly cash flow statement for publication in the International Financial Statistics, following the GFSM 2001 presentation, with some missing breakdowns, particularly for expenditure. Data on fiscal performance at the state level are available only at annual frequency and with a considerable lag. 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), the latest reported data corresponding to 2010. Two years after the reference year, the Ministry of Finance reports general government data to STA in the GFSM 1986 format, that staff reworks to the GFSM 2001 presentation for inclusion in the GFSY (latest reported data correspond to 2008). Data on the general government operations are not internationally comparable as they exclude data on the operations of the extra-budgetary funds, local governments, and social security funds. Under the SDDS, India disseminates annual general government data within 3 quarters after the reference year, using the timeliness flexibility option but meets the SDDS specifications for central government debt and operations.

India: Table of Common Indicators Required for Surveillance

(As of January 7, 2016)

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

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, 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.

1

See http://openindia.worldbankgroup.org for a visualization on the WBG country strategy.

2

Low-income and special category states include: Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha, Rajasthan, Uttar Pradesh, and eight northeast states (Assam, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Sikkim, and Uttarakhand). IFC excludes Himachal Pradesh and Uttarakhand.

3

The India PLR was discussed at the WBG Board of Executive Directors on October 29, 2015.

4

The IIP as published by the RBI values equity liabilities at acquisition cost, while the Fund uses market prices, resulting in substantial differences.