1. The Indian Authorities thank the Staff for constructive discussions and convey their appreciation to the Management and the Staff for their continued engagement. The Authorities look forward to continuing this healthy partnership. This BUFF statement focuses on providing a complete and true picture of the Indian economy.

2. This statement brings together our current perspectives as well as those gathered from last year’s Article IV discussions. Like every other economy in the world, the Indian economy was impacted adversely by the pandemic, the conflict in Europe, the imposition of sanctions, and the synchronized tightening of monetary policy in advanced economies. However, it witnessed a V-shaped recovery in 2021-22 despite the devastating 2^nd wave in Q1 and the 3^rd wave in Q4. This was largely due to robust and swift policy initiatives by the Authorities. In the first quarter of the current year 2022-23, the economy has posted an impressive 13.5% growth, notwithstanding the drag from net exports in the wake of the global slow-down.

3. Driven by the surge in crude oil and other commodity prices, and adverse supply shocks emanating from geopolitical tensions, inflation has persisted at elevated levels. In a cross-country framework, we observe a strong positive relationship between 3-year growth and change in inflation, implying that fiscal stimulus, which is now causing unprecedented inflation world-wide, drove 3-year GDP growth in all countries barring India and Germany. India thus stands out as the positive outlier because of supply-side measures and the sharply targeted demand-side stimulus. India’s fiscal stance during the pandemic was a calibrated expansion in public expenditures with a sharp focus on boosting capex to strengthen the supply side, which also helped to restrain inflationary pressures. The economy increasingly adapted to the new remote work environment, beginning with COVID, with enhanced use of digitalization.

4. The policy package that included fiscal, monetary, and financial measures, which provided support to businesses and households during the pandemic, has turned even more focused and targeted now. India, in contrast to most other economies, continued its agenda of structural reforms during the pandemic and beyond. These wide-ranging structural reforms, which are focused on enhancing the efficiency of all factor markets, include labour reforms, an ambitious program of privatization and asset monetization.

5. While the IMF expects GDP to grow at 6.8% in 2022-23 and 6.1% in 2023-24, RBI projects it to grow at 7.0% and 6.5% respectively. The ongoing structural reforms also suggest that the economy will continue to perform. The September 2022 IIP (Index of Industrial Production) data is now above the pre-pandemic level.

6. Headline consumer price inflation is projected at 6.7% during 2022-23 and is expected to soften to 5.8% by Q4 of 2022-23 and further to 5.0% in Q1:2023-24 [currently at 6.8% y-o-y in October 2022]. Thus, after the blip set in recent months (supply disruptions, oil prices), inflation is projected to remain above the upper bound of the Reserve Bank’s target of 4 (+/- 2)%in Q3:2022-23. Inflationary trends are being closely monitored, and the monetary authorities have decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Structural Reforms

7. The Government has been steadfast in pursuing structural reforms even during the pandemic. As noted by staff, wide-ranging structural reforms are currently being implemented by the Government. Expansion of domestic production-linked incentive schemes to labour-intensive and green sectors, state renewable purchase obligations, and agriculture and labour-market reforms are expected to support sustainable and equitable growth. Labour market reforms are expected to improve labour market functioning, support formalization, enhance female participation, and expand social security benefits for workers.

8. We agree with Staff observations that advancing agriculture and land reforms would address market distortions, increase efficiency, and improve productivity. Implementation of climate-friendly policies is critical for long-term structural reforms towards achieving green and inclusive growth. India continues to play a leading role in the implementation of the climate goals under the Paris agreement. India has recently updated its NDCs (Nationally Determined Contributions) and seeks to achieve Net Zero status by 2070. The drive towards renewable sources of energy and reducing carbon footprint in the economy has yielded significant results on the ground. However, the Authorities believe that implementation of the Paris Agreement on climate change must be based on the principles of equity and common but differentiated responsibilities and respective capabilities, as agreed to, and be accompanied by climate financing and technology transfer. Further, the idea of a carbon price floor, mooted by the Staff, may not be a feasible option as it has huge welfare implications, particularly considering the high indirect fuel taxes on carbon in India.

Fiscal Issues

9. The Authorities largely agree with the Staff for maintaining an accommodative fiscal policy stance in the near term until uncertainties ease, and to have a credible medium-term fiscal consolidation plan, including amendments to the FRBM Act thereafter, to maintain market confidence and fiscal space. The central government fiscal deficit is budgeted at 6.4% of GDP in the current year and the Authorities are strongly committed to reducing it to 4.5% of GDP by 2025-26. Authorities do not share the staff’s view that India’s fiscal space is at risk. Public debt remains very much sustainable given favourable growth dynamics and the strong commitment to consolidation. Given real growth of about 7%, inflation of about 4% expected this decade (i.e., nominal growth of about 11%), and interest rate of about 7%, the r-g differential will be sharply negative, which will drive the debt/GDP ratio down sharply. In fact, the Economic Survey 2020-21 showed that in a worst-case scenario where the real growth is only 4% in the next 10 years, public debt is sustainable. The results also showed that even at high primary deficits, low real growth, and high nominal interest rates, India’s debt will remain sustainable. Debt sustainability risks are also mitigated as the bulk of the public debt is domestic currency denominated, contracted at fixed rates and held by residents. Overall, revenue performance has been buoyant in the current year driven by better compliance. Streamlining of GST with an e-invoice system, GST audits, closer scrutiny of returns and rate rationalization are reflected in augmented tax revenues. Personal income tax and corporate tax collections have been strong.

Monetary Policy

10. RBI has tightened monetary policy in view of persistent inflationary pressures – a cumulative increase of 190 bps in the policy repo rate (currently at 5.90%), a 50-bps increase in the cash reserve ratio and discontinuation of the government securities purchase program. Systemic liquidity also moderated due to capital outflows. The Central Bank (Reserve Bank of India) would stay the course in its continued focus on withdrawal of accommodation to ensure that inflation remains within the target going forward, despite the challenges associated with spillover from advanced economies’ monetary policy actions and the difficulties with consistent forward guidance in a highly uncertain environment. There has been limited Rupee depreciation vis-à-vis USD in 2022 so far as compared with many other emerging market currencies. Going forward, exchange rate flexibility would continue to be the first line of defence in absorbing external shocks, with interventions limited to addressing disorderly market conditions. We agree with the staff that India’s external position remains sufficiently strong with the current level of reserves and strong FDI and portfolio flows to withstand external shocks in the near term. It may be highlighted that although CAD is likely to widen in FY2022-23, the projection of CAD at 3.5% of GDP seems to be on the higher side. In our view, moderation in crude oil prices (Indian basket below US$ 100 since August 2022), and resilience of services exports and remittances may keep the CAD within 3% of GDP in 2022-23.

11. RBI has launched the first pilot project in CBDC - Wholesale segment on November 1, 2022, for settlement of secondary market transactions in government securities. Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. Going forward, other wholesale transactions, and cross-border payments will be the focus of future pilots, based on the learnings from this pilot. The other pilot: CBDC - Retail segment is planned for a launch shortly.

Financial Sector

12. The financial sector continues to be robust and resilient with banks well-capitalized and a strong regulatory framework for supervision in place. As pointed out by staff, credit quality indicators have improved, reflecting stronger corporate and financial sector balance sheets as also the overall resilience of the financial sector. A key distinguishing feature of India’s insolvency regime has been its focus on resolution rather than liquidation. Asset quality review is an ongoing feature of the supervisory framework, which helps in the early detection and identification of potential and actual NPAs, which are then sought to be resolved under the IBC (Insolvency and Bankruptcy Code). We, therefore, do not see any reason for the concern expressed by the Staff that, “incentives to recognize and address problem loans at an early stage are crucial’ to ‘structurally improve banks’ asset quality” as there are already robust systems in place to identify/recognize NPAs.

13. Further, we do not subscribe to the Staff’s view that slow progress in the ‘pre-pack’ route for the resolution of MSMEs is due to a lack of resources when, actually, there have been hardly any filings under this route. Staff’s concern on banks’ exposure to sovereign bonds in a rising interest rate scenario appears overstretched in view of substantial HTM holding as also the mitigating effect of investment fluctuation reserves with banks.

14. As noted by staff, the new scale-based regulatory framework for NBFCs, effective October 2022, aims to further reduce potential regulatory arbitrage between banks and NBFCs. While digitalisation including the recent steps of offline and feature-phone-based payments will surely improve access to financial services, the Authorities strongly believe that fintech advances need to be consistent with the regulatory framework, containing potential vulnerabilities.

Pandemic and Poverty Alleviation

15. 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, Authorities significantly expanded income support, especially for those at the bottom of the income pyramid. For example, food subsidies increased five times in FY 2020-21 (April-March) from the pre-pandemic 2019-20 level. While it declined in 2021-22, it remains nearly three times its pre-pandemic level. In 2022-23, it was budgeted to decline marginally. However, with the extension of the free food program of the Government to end-December 2022, the level of support is expected to sustain in 2022-23 as well.

16. The rules of allocation of food subsidies were also changed. The implementation of the new One-Nation-One-Ration 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. Further, given the large pool of human capital and the limited extent of pandemic-related learning losses, authorities do not see any impact on potential growth over the medium term, although they pointed out that policies are being implemented to ensure catch-up for learning losses during the pandemic.

17. In deriving their conclusions on poverty trends, it appears that the Fund’s Article IV report may not fully reflect the significant support provided by the government to mitigate the impact of the COVID-induced declines in economic activity and their effect on poverty.

18. We would also like to express our reservations about the data used to estimate poverty, employment, and inequality. While the weights used from the unofficial data sources have been adjusted, the poverty estimates continue to rely on the World Bank methodology, which uses the URP (i.e., uniform resource period) method whereas the official estimates use the MMRP (i.e., modified mixed reference period) method.

19. Under the risk assessment matrix, the risk likelihood with respect to large-scale social discontent, we would like to indicate that there is no such evidence of inflation causing social discontent in India, especially as India has not experienced hyperinflation. Even during the current pandemic, inflation has not increased abruptly reflecting coordinated monetary-fiscal measures.

Potential Growth

20. The staff has estimated the potential growth to be about 6% in the medium term in the baseline scenario and 7% in the upside scenario. The RBI has, however, placed it in a range of 6.5-8.6%. The staff analysis is based on unofficial employment surveys. Particularly, female labour force participation rate (FLFPR) is estimated to be very low. On the contrary, FLFPR based on official statistics, if adjusted in line with the UN SNA would be closer to the levels in South Asian and Middle Eastern economies. Further, the staff analysis appears to have missed out on improvements in the quality of employment. The envisaged declining employment-to-population ratio is also contrary to expectations with the emphasis on manufacturing, going forward.

21. Emerging Market Economies are evolving and more complex, and it requires greater analytical rigour to comprehend the economic dynamics and the underlying growth impulses, especially when key structural reforms are changing the economic path for such economies. As fellow economists, we appreciate staff efforts and urge an approach where the different boundary conditions of such economies are incorporated into the standard paradigms that are primarily focused on describing advanced economies.