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.
This statement contains information that has become available since the staff report was circulated to the Executive Board. This information does not alter the thrust of the staff appraisal.
1. Historical GDP figures for FY2011/12–FY2014/15 have been revised. India’s Ministry of Statistics released (on January 29), revised estimates for the national accounts for these years, which suggest a more gradual growth recovery during the period 2012–14. The revision to FY2014/15 growth has been minor (down to 7.2 percent from 7.3 percent). However, the revised series for GDP (at market prices) indicates that growth accelerated from 5.6 percent in FY2012/13 to 6.6 percent in FY2013/14, compared to an acceleration from 5.1 percent to 6.9 percent, respectively, in the previous data vintage.
2. The Q3 FY2015/16 estimate for real GDP growth at market prices was also released, indicating quarterly growth of 7.3 percent, in line with staff forecasts. This suggests some moderation in momentum, as growth in the first half of FY2015/16 has been revised upward from 7.2 percent to 7.6 percent. This GDP data (at market prices) indicates that domestic demand, primarily private consumption, remains a key growth driver, while an increase in exports (on a seasonally adjusted basis) indicates a likely bottoming out of export receipts. However, the ongoing investment recovery remains unsteady, as growth of capital formation decelerated from 7.3 percent in the first half of the fiscal year to 3.1 percent in the third quarter of FY2015/16. Finally, the services PMI rose to a ten-month high in December 2015, on account of improved new business orders and upbeat expectations.
3. The Reserve Bank of India (RBI) kept its policy repo rate unchanged at 6.75 percent on February 2, in line with market expectations. The RBI stated in its latest bi-monthly monetary policy statement that the rationale for its decision was the absence of major new inflationary developments and a reasonable pace of economic recovery. The RBI did caution that the implementation of the recommendations of the Seventh Pay Commission would have an inflationary impact for a period of up to two years. With regard to the forthcoming Union Budget, the RBI noted that pro-growth structural reforms that also keep spending in check would create greater space for monetary policy. Recent data indicates that since mid-December 2015, bank credit growth has picked up from 9.9 percent to 11.6 percent.
4. International reserves have declined by US$ 1.2 billion in 2016, standing at US$ 349 billion at the end of January 2016. Net portfolio investment outflows (both equity and debt) amounted to US$ 1.3 billion in January 2016, and so far in February there have been net inflows of about US$ 190 million. Foreign direct investment inflows have been robust, amounting to US$ 35 billion during the first eight months of FY2015/16, an increase of 25 percent over the corresponding period of the previous fiscal year. International reserves now represent about 8 months of next year’s imports of goods and services. Official intervention data indicates that the RBI’s net spot sale of foreign currency amounted to only US$ 179 million in December 2015, with outstanding net forward purchases of foreign currency standing at US$ 2 billion at end-December. The Indian rupee depreciated by about 2.5 percent in January 2016, and has changed little since.
5. The Indian authorities have taken further steps to enhance the recently introduced gold monetization schemes. In mid-January, the government launched a second tranche of the Sovereign Gold Bond Scheme and in late January, the RBI modified certain aspects of the Gold Monetization Scheme (GMS). For example, with the GMS, the RBI allowed early withdrawals of medium- and long-term government deposits, following minimum lock-in periods of three and five years, respectively.