1. On behalf of our authorities, we would like to thank staff for presenting a comprehensive and balanced assessment of recent macroeconomic and financial sector developments in India and the evolving outlook. The mission team had broad-based and open discussions with our authorities, who broadly share the staff’s assessment.
2. The Indian economy has embarked on a steady growth path during the past two years. During FY2014-15, India’s GVA (gross value added at basic prices) growth recovered to 7.1 per cent from 6.3 per cent recorded in the previous fiscal year. The same year, India’s services sector grew by 10.3 per cent, manufacturing by 5.4 per cent, and agriculture by 1.3 per cent. More recently, India’s GVA (at basic prices) growth during October-December 2015 (FY 2015-16) stood at 7.1 per cent, making it the fastest growing major economy. Our authorities took advantage of the sharp decline in the global oil and commodity prices to significantly reduce fuel subsidies and increase excise taxes on petroleum products. Resources obtained from lower subsidies and higher excise taxes have helped in lowering deficits and increasing capital expenditure. Inflation is expected to remain within the target band set under the new monetary policy framework put in place in February 2015. This would also be supported by a sustainable medium-term fiscal consolidation strategy being pursued by our authorities.
3. While the recovery in various sectors of the economy has not been uniform, our authorities have taken swift and effective policy measures to address the challenges facing the economy. Progress is visible in several areas, particularly in the ease of doing business. Some key reforms on the anvil, most notably the Goods and Services Tax (GST), would further spur economic activity and exert a downward pressure on inflation. Export growth and foreign capital inflows, however, face some risks from the slowdown in global demand and heightened volatility in global financial markets. The authorities recognize that bank balance sheets need to be strengthened and have taken action in this direction.
The Constitution of India requires the setting up of a Finance Commission every five years, or earlier. The Finance Commission recommends the distribution of the net proceeds of taxes of the Union between the Union and the states. The report of the Fourteenth Finance Commission was submitted to the Parliament in February 2015. The states’ share in the net proceeds of the Union tax revenues would now be 42 per cent, up from the current level of 32 per cent (which was recommended by the previous Finance Commission). This is the largest ever change in the percentage of devolution to the states. In the past, when Finance Commissions have recommended an increase, it has been in the range of 1-2 per cent increase. As compared to the total devolutions in 2014-15, the total devolution of the States in 2015-16 is expected to increase by over 45 percent.