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IMF Country Report No. 21/230
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IMF Country Report No. 21/230
INDIA
2021 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR INDIA
October 2021
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2021 Article IV consultation with India, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its September 17, 2021 consideration of the staff report that concluded the Article IV consultation with India.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on September 17, 2021, following discussions that ended July 28, 2021, with the officials of India on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on August 31, 2021.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for India.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2021 International Monetary Fund
Press Release
PR21/299
IMF Executive Board Concludes 2021 Article IV Consultation with India
FOR IMMEDIATE RELEASE
Washington, DC – October 15, 2021: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with India.
India was among the fastest-growing economies in the world in the decade before the pandemic, lifting millions out of poverty. While the economy was moderating prior to the COVID-19 shock, the pandemic implied unprecedented challenges. Two COVID-19 waves caused a health and economic crisis however, the economy is gradually recovering. Following the first wave, GDP contracted an unprecedented 7.3 percent in FY2020/21. The second wave resulted in another sharp fall in activity, albeit smaller and shorter, and recent high frequency indicators suggest an ongoing recovery. Inflation pressures have been elevated, yet inflation eased to 5.6 percent in July, returning to within the RBI’s inflation target of 4±2 percent, driven by softer food prices and base effects.
The authorities’ economic response, which was swift and substantial, has included fiscal support, including scaled-up support to vulnerable groups, monetary policy easing, liquidity provision, and accommodative financial sector and regulatory policies. Despite the pandemic, the authorities have continued to introduce structural reforms, including labor reforms and a privatization plan.
Growth is projected at 9.5 percent in FY2021/22 and 8.5 percent in FY2022/23. Headline inflation is projected at 5.6 percent in FY2021/22, amid elevated price pressures. The contraction in economic activity, lower revenue, and pandemic-related support measures are estimated to have led to a widening of the fiscal deficit to 8.6 and 12.8 percent of GDP in FY2020/21 for the central and general governments, respectively. Fiscal policy continues to support the economy in FY2021/22. Despite policy support, bank credit growth has remained subdued, while large corporates have benefited from easier conditions in capital markets. Net inflows and improvement in the current account have supported an increase in foreign exchange reserves. The current account balance is projected to return to a deficit of about 1 percent of GDP in FY2021/22, due to a gradual recovery in domestic demand and higher oil prices.
The economic outlook remains clouded due to pandemic-related uncertainties contributing to both downside and upside risks. A persistent negative impact of COVID-19 on investment, human capital, and other growth drivers could prolong the recovery and impact medium-term growth. While India benefits from favorable demographics, disruption to access to education and training due to the pandemic could weigh on improvements in human capital. At the same time, the recovery could also be faster than expected. Faster vaccination and better therapeutics could help contain the spread and limit the impact of the pandemic. In addition, successful implementation of the announced wide-ranging structural reforms could increase India’s growth potential.
Executive Board Assessment
They welcomed the recent economic recovery and noted that India is projected to be one of the fastest growing major economies for this year and beyond. Directors commended the authorities’ response to the pandemic which includes scaled-up support to vulnerable groups, monetary policy easing and liquidity provision, accommodative financial sector and regulatory policies, and continued structural reforms. Directors encouraged the authorities to maintain the scaled-up vaccination momentum, continue with policy accommodation until the recovery is fully entrenched, and accelerate structural reforms to achieve a more inclusive and sustainable growth, while keeping public debt vulnerabilities in check.
Directors agreed that addressing the health crisis remains a near-term policy priority. In that context, they welcomed the recent increase in vaccinations. They also positively noted India’s contributions to the global fight against the pandemic as a vaccine producer.
Directors indicated that further fiscal support underpinned by targeted spending on social protection, employment support and health spending is warranted until the recovery is secure. They encouraged the authorities to increase public expenditure in infrastructure, education, health, and social safety nets which can also help achieve the Sustainable Development Goals and boost potential growth. Fiscal space can be enhanced through a credible and clearly communicated medium-term fiscal consolidation strategy, enhancements in expenditure efficiency, improved public financial management and revenue enhancing measures, as well as the privatization agenda.
Directors agreed that maintaining accommodative monetary policy remains appropriate, although elevated inflation pressures need to be closely monitored. Looking ahead, a well-communicated plan for a gradual reduction in monetary policy support as the recovery strengthens would foster orderly market transitions.
Directors also welcomed the authorities’ commitment to maintain exchange rate flexibility, which can serve as the main shock absorber, with foreign exchange interventions limited to addressing disorderly market conditions.
Directors agreed that financial sector policies have moderated the adverse impact of the pandemic. While targeted support to viable corporates should continue, they indicated that policies facilitating the exit of non-viable firms are also warranted. Directors observed that ensuring adequate bank capitalization and effective NPL resolution will enable the financial system to further increase its resilience and better support the recovery.
Directors commended the authorities for advancing structural reforms despite the pandemic and stressed the need for their steadfast implementation. Long-standing reform priorities include ongoing labor and land reforms, infrastructure investment, improvements in governance, continued trade and investment liberalization, and improving education outcomes. Such reforms would not only help maximize India’s long-term growth and demographic dividend, but also help alleviate poverty and inequality, and deepen the country’s integration into global value chains. India’s progress toward transitioning to a greener and more inclusive economy is welcome.
India: Selected Social and Economic Indicators, 2017/18–2022/23 1/
Data are for April–March fiscal years.
Based on the percentage share of consumption that accrues to subgroups of the population indicated by deciles noted.
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.
India: Selected Social and Economic Indicators, 2017/18–2022/23 1/
| 2017/18 | 2018/19 | 2019/20 | 2020/21 | 2021/22 | 2022/23 | |||
|---|---|---|---|---|---|---|---|---|
| Est. | Projections | |||||||
| Growth (in percent) | ||||||||
| Real GDP (at market prices) | 6.8 | 6.5 | 4.0 | -7.3 | 9.5 | 8.5 | ||
| Prices (percent change, period average) | ||||||||
| Consumer prices – Combined | 3.6 | 3.4 | 4.8 | 6.2 | 5.6 | 4.9 | ||
| Saving and investment (percent of GDP) | ||||||||
| Gross saving 3/ | 29.1 | 30.0 | 29.8 | 30.2 | 29.2 | 29.5 | ||
| Gross investment 3/ | 31.0 | 32.1 | 30.7 | 29.3 | 30.2 | 30.8 | ||
| Fiscal position (percent of GDP) 4/ | ||||||||
| Central government overall balance | -3.8 | -3.9 | -4.8 | -8.6 | -7.3 | -6.2 | ||
| General government overall balance | -6.2 | -6.4 | -7.4 | -12.8 | -11.3 | -9.7 | ||
| General government debt 5/ | 69.7 | 70.4 | 74.1 | 89.6 | 90.7 | 88.9 | ||
| Cyclically adjusted balance (% of potential GDP) | -6.6 | -6.8 | -7.4 | -8.9 | -9.4 | -9.1 | ||
| Cyclically adjusted primary balance (% of potential GDP) | -1.7 | -1.9 | -2.7 | -3.9 | -4.0 | -3.7 | ||
| Money and credit (y/y percent change, end-period) | ||||||||
| Broad money | 9.2 | 10.5 | 8.9 | 11.7 | 6.9 | 8.7 | ||
| Domestic Credit | 7.7 | 11.8 | 8.3 | 8.1 | 8.2 | 9.1 | ||
| Financial indicators (percent, end-period) | ||||||||
| 91-day treasury bill yield (end-period) | 6.2 | 6.2 | 4.4 | 3.3 | … | … | ||
| 10-year government bond yield (end-period) | 7.4 | 7.4 | 6.7 | 6.2 | … | … | ||
| Stock market (y/y percent change, end-period) | 11.3 | 17.3 | -23.8 | 68.0 | … | … | ||
| External trade (on balance of payments basis) | ||||||||
| Merchandise exports (in billions of U.S. dollars) | 309.0 | 337.2 | 320.4 | 296.3 | 360.8 | 378.1 | ||
| (Annual percent change) | 10.3 | 9.1 | -5.0 | -7.5 | 21.8 | 4.8 | ||
| Merchandise imports (in billions of U.S. dollars) | 469.0 | 517.5 | 477.9 | 398.5 | 520.5 | 555.3 | ||
| (Annual percent change) | 19.5 | 10.3 | -7.6 | -16.6 | 30.6 | 6.7 | ||
| Terms of trade (G&S, annual percent change) | -2.8 | -2.1 | 1.6 | 1.3 | -6.6 | 0.9 | ||
| Balance of payments (in billions of U.S. dollars) | ||||||||
| Current account balance | -48.7 | -57.2 | -24.6 | 24.0 | -29.1 | -43.2 | ||
| (In percent of GDP) | -1.8 | -2.1 | -0.9 | 0.9 | -1.0 | -1.4 | ||
| Foreign direct investment, net (“-” signifies inflow) | -30.3 | -30.7 | -43.0 | -44.0 | -46.4 | -51.1 | ||
| Portfolio investment, net (equity and debt, “-” = inflow) | -22.1 | 2.4 | -1.4 | -36.1 | -26.1 | -34.5 | ||
| Overall balance (“-” signifies balance of payments surplus) | 43.6 | -3.3 | 59.5 | 87.3 | 46.6 | 52.4 | ||
| External indicators | ||||||||
| Gross reserves (in billions of U.S. dollars, end-period) | 424.5 | 412.9 | 477.8 | 577.0 | 641.5 | 694.0 | ||
| (In months of next year’s imports (goods and services)) | 7.9 | 8.2 | 11.1 | 10.6 | 11.0 | 11.0 | ||
| External debt (in billions of U.S. dollars, end-period) | 529.3 | 543.1 | 558.4 | 570.0 | 633.5 | 694.6 | ||
| External debt (percent of GDP, end-period) | 20.0 | 20.1 | 19.5 | 21.4 | 21.8 | 21.7 | ||
| Of which: Short-term debt | 8.3 | 8.8 | 8.4 | 9.2 | 9.5 | 9.7 | ||
| Ratio of gross reserves to short-term debt (end-period) | 1.9 | 1.7 | 2.0 | 2.4 | 2.3 | 2.2 | ||
| Real effective exchange rate (annual avg. percent change) | 3.5 | -5.0 | 3.3 | -0.9 | … | … | ||
| Exchange rate (rupee/U.S. dollar, end-period) | 65.0 | 69.2 | 75.4 | 73.5 | … | … | ||
| Memorandum item (in percent of GDP) | ||||||||
| Fiscal balance under authorities’ definition | -3.5 | -3.4 | -4.6 | -9.2 | -7.0 | -5.9 | ||
Data are for April–March fiscal years.
Based on the percentage share of consumption that accrues to subgroups of the population indicated by deciles noted.
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.
India: Selected Social and Economic Indicators, 2017/18–2022/23 1/
| 2017/18 | 2018/19 | 2019/20 | 2020/21 | 2021/22 | 2022/23 | |||
|---|---|---|---|---|---|---|---|---|
| Est. | Projections | |||||||
| Growth (in percent) | ||||||||
| Real GDP (at market prices) | 6.8 | 6.5 | 4.0 | -7.3 | 9.5 | 8.5 | ||
| Prices (percent change, period average) | ||||||||
| Consumer prices – Combined | 3.6 | 3.4 | 4.8 | 6.2 | 5.6 | 4.9 | ||
| Saving and investment (percent of GDP) | ||||||||
| Gross saving 3/ | 29.1 | 30.0 | 29.8 | 30.2 | 29.2 | 29.5 | ||
| Gross investment 3/ | 31.0 | 32.1 | 30.7 | 29.3 | 30.2 | 30.8 | ||
| Fiscal position (percent of GDP) 4/ | ||||||||
| Central government overall balance | -3.8 | -3.9 | -4.8 | -8.6 | -7.3 | -6.2 | ||
| General government overall balance | -6.2 | -6.4 | -7.4 | -12.8 | -11.3 | -9.7 | ||
| General government debt 5/ | 69.7 | 70.4 | 74.1 | 89.6 | 90.7 | 88.9 | ||
| Cyclically adjusted balance (% of potential GDP) | -6.6 | -6.8 | -7.4 | -8.9 | -9.4 | -9.1 | ||
| Cyclically adjusted primary balance (% of potential GDP) | -1.7 | -1.9 | -2.7 | -3.9 | -4.0 | -3.7 | ||
| Money and credit (y/y percent change, end-period) | ||||||||
| Broad money | 9.2 | 10.5 | 8.9 | 11.7 | 6.9 | 8.7 | ||
| Domestic Credit | 7.7 | 11.8 | 8.3 | 8.1 | 8.2 | 9.1 | ||
| Financial indicators (percent, end-period) | ||||||||
| 91-day treasury bill yield (end-period) | 6.2 | 6.2 | 4.4 | 3.3 | … | … | ||
| 10-year government bond yield (end-period) | 7.4 | 7.4 | 6.7 | 6.2 | … | … | ||
| Stock market (y/y percent change, end-period) | 11.3 | 17.3 | -23.8 | 68.0 | … | … | ||
| External trade (on balance of payments basis) | ||||||||
| Merchandise exports (in billions of U.S. dollars) | 309.0 | 337.2 | 320.4 | 296.3 | 360.8 | 378.1 | ||
| (Annual percent change) | 10.3 | 9.1 | -5.0 | -7.5 | 21.8 | 4.8 | ||
| Merchandise imports (in billions of U.S. dollars) | 469.0 | 517.5 | 477.9 | 398.5 | 520.5 | 555.3 | ||
| (Annual percent change) | 19.5 | 10.3 | -7.6 | -16.6 | 30.6 | 6.7 | ||
| Terms of trade (G&S, annual percent change) | -2.8 | -2.1 | 1.6 | 1.3 | -6.6 | 0.9 | ||
| Balance of payments (in billions of U.S. dollars) | ||||||||
| Current account balance | -48.7 | -57.2 | -24.6 | 24.0 | -29.1 | -43.2 | ||
| (In percent of GDP) | -1.8 | -2.1 | -0.9 | 0.9 | -1.0 | -1.4 | ||
| Foreign direct investment, net (“-” signifies inflow) | -30.3 | -30.7 | -43.0 | -44.0 | -46.4 | -51.1 | ||
| Portfolio investment, net (equity and debt, “-” = inflow) | -22.1 | 2.4 | -1.4 | -36.1 | -26.1 | -34.5 | ||
| Overall balance (“-” signifies balance of payments surplus) | 43.6 | -3.3 | 59.5 | 87.3 | 46.6 | 52.4 | ||
| External indicators | ||||||||
| Gross reserves (in billions of U.S. dollars, end-period) | 424.5 | 412.9 | 477.8 | 577.0 | 641.5 | 694.0 | ||
| (In months of next year’s imports (goods and services)) | 7.9 | 8.2 | 11.1 | 10.6 | 11.0 | 11.0 | ||
| External debt (in billions of U.S. dollars, end-period) | 529.3 | 543.1 | 558.4 | 570.0 | 633.5 | 694.6 | ||
| External debt (percent of GDP, end-period) | 20.0 | 20.1 | 19.5 | 21.4 | 21.8 | 21.7 | ||
| Of which: Short-term debt | 8.3 | 8.8 | 8.4 | 9.2 | 9.5 | 9.7 | ||
| Ratio of gross reserves to short-term debt (end-period) | 1.9 | 1.7 | 2.0 | 2.4 | 2.3 | 2.2 | ||
| Real effective exchange rate (annual avg. percent change) | 3.5 | -5.0 | 3.3 | -0.9 | … | … | ||
| Exchange rate (rupee/U.S. dollar, end-period) | 65.0 | 69.2 | 75.4 | 73.5 | … | … | ||
| Memorandum item (in percent of GDP) | ||||||||
| Fiscal balance under authorities’ definition | -3.5 | -3.4 | -4.6 | -9.2 | -7.0 | -5.9 | ||
Data are for April–March fiscal years.
Based on the percentage share of consumption that accrues to subgroups of the population indicated by deciles noted.
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.
Title page
INDIA
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION
August 31, 2021
KEY ISSUES
Context. The ongoing COVID-19 pandemic has created a prolonged health crisis. Economic activity was slowing prior to the pandemic. Two COVID-19 waves have resulted in a deep and broad-based economic downturn with the potential for a longer lasting impact. The authorities have responded with fiscal policy, including scaled-up support to vulnerable groups, monetary policy easing and liquidity provision, and accommodative financial sector and regulatory policies. Despite the pandemic, the authorities have continued to implement structural reforms.
Outlook and risks. Following a sharp contraction in GDP last year, growth is expected to rebound to 9.5 percent this year and 8.5 percent in FY2022/23. The recovery in consumption and investment is expected to be gradual given the second wave and concerns about a third wave, and the need to further strengthen the financial sector. Uncertainty about the economic outlook remains elevated, with pandemic-related uncertainties contributing to both downside and upside risks.
Policy Recommendations.
• Addressing the ongoing health crisis. A continued coordinated policy response to fight the virus, including through vaccinations, is critical to overcome the ongoing health crisis. Additional fiscal support is warranted until recovery is fully entrenched , including additional spending on health and to support the most vulnerable groups. Monetary policy should remain accommodative and ensure adequate systemic liquidity and targeted support to viable corporates and borrower relief measures should continue.
• Policies to support the recovery. While fiscal space has narrowed, fiscal policy can and should play a key role in facilitating a strong, inclusive, and green economic recovery and help avoid an adverse, longer lasting impact. Policy space can be enhanced through a credible and clearly communicated medium-term fiscal consolidation strategy that outlines a gradual removal of policy support and revenue enhancing measures. While closely monitoring elevated inflation pressures, maintaining accommodative monetary policy remains appropriate until growth begins to firmly recover. Financial sector and regulatory policies should support the recovery, while allowing the exit of non-viable firms and encouraging banks to continue building capital buffers and recognize problem loans. Exchange rate flexibility should act as the main shock absorber, with intervention limited to addressing disorderly market conditions. Steadfast implementation of announced structural reforms and further efforts to broaden them are needed. Reduction in tariffs, especially on intermediate goods, and further investment liberalization can foster India’s integration into global value chains and maximize India’s growth potential. Broad-based, tailored, and sustained support for students will be important to minimize adverse labor market implications and improve education outcomes.
Approved By
Anne-Marie Gulde-Wolf and Anna Ilyina
Remote discussions took place July 12-28, 2021. The team comprised A. Schipke (Head), R. Agarwal, F. Ahmed, E. Arbatli-Saxegaard, J. Turunen, T. Xu (all APD), L. Gornicka (MCM), M. Binici (SPR), M. MacDonald (RES) and L. Breuer (Senior Resident Representative). S. Mohapatra assisted the mission. S. Bhalla and R. Goyal (both OED) also participated in some mission meetings. The mission met with the Economic Affairs Secretary A. Seth, Chief Economic Advisor K. Subramanian, RBI Deputy Governors M. R. Rao and M. D. Patra, and other senior government and RBI officials, along with representatives from the private sector. K. Rivas and N. Singh (both APD) assisted in the preparation of this report.
Contents
COVID-19 PANDEMIC
DEEP ECONOMIC AND SOCIAL IMPACT
GRADUAL ECONOMIC RECOVERY AMID ELEVATED UNCERTAINTY
FISCAL POLICY TO SUPPORT THE VULNERABLE AND POST-PANDEMIC RECOVERY
ACCOMMODATIVE MONETARY POLICY
POLICIES TO SUPPORT GROWTH AND MAINTAIN FINANCIAL STABILITY
STRUCTURAL REFORMS FOR INCLUSIVE GROWTH
OTHER ISSUES
STAFF APPRAISAL
FIGURES
1. COVID-19 Developments
2. Recent Macroeconomic Developments
3. External Sector Developments
4. Financial Market Developments
5. Monetary Sector Developments
6. Fiscal Sector Developments
7. Corporate and Banking Sectors
TABLES
1. Selected Social and Economic Indicators, 2017/18–2022/23
2. Balance of Payments, 2017/18–2022/23
3. Reserve Money and Monetary Survey, 2014/15- June 2021/22
4. Central Government Operations, 2017/18–2022/23
5. General Government Operations, 2017/18–2022/23
6. Macroeconomic Framework, 2017/18–2026/27
7. Indicators of External Vulnerability, 2013/14–2020/21
8. Financial Soundness Indicators, 2014/15–2020/21
9. High Frequency Economic Activity Indicators
BOXES
1. Downside Scenario
2. India’s State-Owned Enterprises
3. Corporate Sector Resilience
APPENDICES
I. External Sector Assessment
II. Risk Assessment Matrix
III. Debt Sustainability Analysis
IV. FSAP Reforms
V. Recent and Planned Capacity Development
VI. Uptake of Previous IMF Advice
VII. Key Policy Actions
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. This year’s discussions were virtual. On return to headquarters, the staff prepares a report, which forms the basis f or discussion by the Executive Board.
