Abstract
1. Our Indian Authorities thank staff for the candid and constructive discussions (held virtually) and convey their appreciation to the management and staff for their continued engagement. Our Authorities look forward to continuing this healthy partnership. The authorities broadly agree with staff s assessment and recommendations regarding the economy, although there are some divergences in views on a few issues, as highlighted in this BUFF statement.
1. Our Indian Authorities thank staff for the candid and constructive discussions (held virtually) and convey their appreciation to the management and staff for their continued engagement. Our Authorities look forward to continuing this healthy partnership. The authorities broadly agree with staff s assessment and recommendations regarding the economy, although there are some divergences in views on a few issues, as highlighted in this BUFF statement.
2. Like almost every economy, the pandemic has had a significant impact on economic activity. During the first wave in 2020, the economy witnessed a sharp contraction reflecting the impact of strict containment measures, though it recorded a turnaround two quarters later in January-March 2021 with swift and effective measures taken by the Authorities. The recovery, however, moderated with the second wave during the first quarter of the current financial year (April-June 2021). The economy increasingly adapted to the work environment under CO VID with enhanced use of digitalization.
3. While the policy package that included fiscal, monetary, and financial measures, provided support to businesses and households at an unprecedented scale, India, in divergence with most other economies, continued its agenda of structural reforms during the pandemic. These wide-ranging structural reforms, including agriculture and labor reforms, and an ambitious program of privatization, are expected to contribute towards a structural acceleration of the economy.
4. India has embarked upon a drive to vaccinate its large population of 1.3 billion; supply constraints had hindered the progress earlier, but at the current pace of more than 10 million a day, the target to fully vaccinate at least 60 percent of its population by the end-December 2021, is on track. Latest (September 10th) figures indicate that 40 % of the population has at least one dose of the vaccine, close to the world average of 41 %.
5. Both IMF and the RBI have projected India’s GDP to grow at 9.5 percent in 2021 -22 (i.e., April 2021-March 2022) and the FMF expects GDP to grow at 8.5 percent in the next fiscal year. Early indications are (direct and indirect tax collections, export growth, growth in industrial production, PMI indices) that economic targets contained in Budget 2021/22 will be achieved and that India will emerge as the fastest-growing major economy in 2021/22, and beyond. Structural reforms also suggest that the economy will do better than currently expected beyond 2021/22. The July 2021 IIP data is now above the pre-pandemic level.
6. Headline consumer price inflation is projected at 5.6 percent during 2021–22 and to soften to 5.1 percent by the first quarter of 2022–23 [currently at 5.3 % yoy in August 2021]. Further, after a blip in recent months (supply disruptions, oil prices) inflation is expected to remain within the upper bound of the Reserve Bank’s target of 4 (+/- 2) percent. Inflationary trends are being closely monitored, and the monetary authorities have decided to continue with an accommodative stance as long as necessary to sustain output growth on a durable basis.
Structural Reforms
7. Staff supported the wide-ranging structural reforms initiated by the Government. Domestic production-linked incentive schemes, privatization of government enterprises in non-strategic sectors, agriculture and labor market reforms are expected to support sustainable and equitable growth. Labor market reforms are expected to improve labour market functioning, support formalization, and expand social security benefits for workers. Staff also observed that reforms in the agriculture sector would address market distortions, increase efficiency, and enhance productivity growth.
Fiscal Issues
8. The Authorities agree with the Staff for maintaining an accommodative fiscal policy stance in the near term till the recovery is firm and to have a credible medium-term fiscal consolidation plan to maintain market confidence and fiscal space. The central government fiscal deficit is budgeted at 6.8 percent of GDP in the current year and the Authorities are committed to reduce it to 4.5 percent of GDP by 2025–26. Next y ear’s budget will include medium-term macroeconomic projections and the Fiscal Responsibility and Budget Management Act (FRBM) will also be revised to provide more clarity and fiscal transparency. Revenue mobilization would be a key element of medium-term fiscal strategy. Streamlining of Goods and Services (GST) tax with an e-invoice system, GST audits, closer scrutiny of returns, and rate rationalization are expected to augment tax revenues. Similarly, rationalized corporate income tax rates are expected to encourage compliance and result in greater tax buoyancy. Disinvestment with a focus on privatization and monetization of sovereign assets would also support the consolidation process. The thrust on expanded public expenditures, which include expenditures on education, skill development, health, and infrastructure will continue – and these are expected to enhance productivity and potential growth. Further, enhanced public investment in infrastructure is expected to crowd in private investment.
Monetary Policy
9. The staff has supported RBI’s accommodating monetary stance – a cumulative reduction of 115 bps in the repo rate (current rate 4 %), in addition to the pre-pandemic easing of 135 bpsintherepo and 100 bps reduction in the cash reserve ratio. The staff has also commended liquidity measures including long-term repo operations (TLTRO), operation twist, and asset purchases. The Authorities have indicated that they would continue their accommodative monetary policy stance as long as necessary to revive and sustain growth on a durable basis while ensuring that inflation remains within the target. To ensure that additional liquidity goes to revive the economic activity, the funds accessed by the banks under TLTRO are required to be invested in corporate bonds, commercial paper and non-convertible debentures issued by entities in agriculture, retail, MSME and drugs sectors. The RBI has indicated that post-pandemic exit policies would be guided by the expiration of time-bound monetary and liquidity measures.
Financial Sector
10. The Authorities concur with the staff that it is important to ensure adequate capitalization of financial intermediaries. To contain the expected increase in NPAs, the Authorities are working to streamline the insolvency process and to bring in reforms to reduce the delays in the Insolvency and Bankruptcy Code (IBC) proceedings. The Authorities have also proposed to start a new structure for resolution of NPAs. It was needed because existing ARCs are thinly capitalised. This will be fashioned as per ARC-AMC model where the ARC will aggregate all the stressed assets and transfer to a professionally managed AMC. It would be setup jointly by the public and private sector banks and government would not make any equity contribution.
11. Stress tests undertaken by RBI (and referred to in the Staff report in the context of NPAs) revealed that “banks remain well-capitalized and able to sustain a severe stress scenario, (page 40, Financial Stability Report, RBI, July 2021)”. Moreover, the government is ready to provide additional capital to public sector banks (PSBs) as and when needed. Therefore, the conclusion in the Staff Report that “sustained financial sector weaknesses” would lower India’s potential growth from the earlier assumed 7.3 % to the Report’s forecast of 6 % (emphasis added) is analytically inappropriate.
Pandemic and Poverty Alleviation
12. Like the rest of the world, the pandemic led to a decline in economic activity, affected inequality, and hurt the poor the most. Recognizing this, and as part of its strategy to combat the expected poverty increase, my Authorities significantly expanded income support, and especially for those at the bottom of the income pyramid (e.g., food subsidies more than doubled in FY 2020–21 (April-March) from the pre-pandemic 2019–20 level.) In aggregate terms, the share of GDP allocated to direct income support for the poor increased from 2.1% to 2.7%.
13. The rules of allocation of food subsidies were also changed. The implementation of the new one nation-one-card policy meant that the bottom two-thirds of the population eligible for food subsidy could now access it from anywhere in India rather than be restricted to the state of their registration. This change was especially beneficial for the migrant and poor workers.
14. In deriving their conclusions on poverty trends, it appears that the Fund’s Article TV report has not fully appreciated the significant support provided by the government to mitigate the impact of the COVID induced declines in economic activity and their effect on poverty.
15. Emerging Market Economies are evolving and more complex, and it requires greater analytical rigour to comprehend the economic dynamics and the underlying growth impulses. As a fellow economist, I would request the staff for a deeper and more rigorous analysis of the complex issues like the socio-economic effects of the pandemic, the government’s multipronged policy response, and their effectiveness in protecting lives, livelihoods and containing poverty.