Transcript of a Conference Call on the Article IV Consultation with India, with Kalpana Kochhar, Deputy Director, Asia and Pacific Department, and Laura Papi, Division Chief, Asia and Pacific Department

February 4, 2010

With Kalpana Kochhar, Deputy Director, Asia and Pacific Department, and Laura Papi, Division Chief, Asia and Pacific Department
Washington, D.C.
Thursday, February 4, 2010

MS. KOCHHAR: Welcome, everybody. For this Article IV, we focused on three issues, but let me just give you a little bit of background before I get to that. As you know, India was one of the first countries to recover from the crisis. It benefited from the normalization of global financing conditions and the return of risk appetite, but also benefitted from fiscal stimulus that was already in the pipeline and from timely monetary and further fiscal easing after the crisis broke out.

We project growth to reach 6.75 percent for the year ending March, 2010, and then rising to 8 percent for the year ending March, 2011. We believe there are a lot of indications already in the pipeline that suggest that this recovery will in fact occur and will broaden. Along with the recovery, we’ve seen an upward rise in prices. Inflation has picked up. Some of it is due to food, but some of it is also due to demand pressures.

So, against that background, we focused on what should be the stance of monetary policy. We have recommended, and we welcome in fact, the moves that were taken by the Reserve Bank of India (RBI) just last week to tighten monetary policy. And we believe that, given current trends, there should be further gradual withdrawal of monetary accommodation.

We also discussed fiscal policy here. Although we believe that the stimulus measures that were put in place were instrumental in supporting activity during the crisis, it has pushed the deficit into double digits again, and the debt back to nearly 80 percent. We, therefore, recommend that the fiscal adjustment strategy begin with this next budget, which the finance minister has already announced will happen, and we believe it should be anchored on a debt target along with some nominal expenditure rules.

However, we’ve also noted in our report that just setting a debt target isn’t enough. It has to be accompanied by measures. In particular, we welcome the measures on the revenue side that are in the pipeline, but we also want to see measures on the expenditure side, particularly subsidy reform.

And the third issue that we focused on was in financial sector reform. In particular, we discussed reforms of the financial sector that would be beneficial to finance the major infrastructure investment that the government of India is planning over the next few years.

Thank you. Now I’ll take your questions.

QUESTIONER: You advise that the conditions are right for the Reserve Bank of India to start normalizing the interest rates. Do you have any view on the reversing of fiscal stimulus that the government had announced last year, like the tax cuts and reduction in the service taxes?

MS. KOCHHAR: We have taken the position that for the same reason that we believe it’s timely to withdraw the monetary stimulus, which means that we see growth picking up and becoming more broad-based, and all the leading indicators -- things like the purchasing managers index for industry and services -- suggesting that the recovery will continue. We do believe it’s time to withdraw the stimulus also on the fiscal side.

But, more importantly, with the debt burden being so high, it actually constrains the space for very essential fiscal spending that the government needs to do, including on poverty and its goals of inclusiveness. So it does need to reduce the deficit in order to make space for essential spending. And, yes, we do believe it’s time to unwind the stimulus measures that were put in place last year.

QUESTIONER: What are your thoughts about the Indian rupee vis-à-vis Chinese currency?

MS. KOCHHAR: I’m going to answer your question just on the Indian rupee. We have a number of ways in which we look at whether the value of any currency, including the rupee, is in line with what we call fundamentals. Our assessment in the case of the Indian rupee is that it is broadly in line with fundamentals. Our assessment actually hasn’t changed in a couple of years that this is the case, and we believe this is because of the policy of the RBI to allow the exchange rate to float and to move in both directions in line with market forces.

QUESTIONER: I was just wondering if you could give a few thoughts on India’s role in helping the global economic recovery. A lot is being made right now of the role of India and China in joining the recovery, and I wondered how you see it.

MS. KOCHHAR: It’s actually true, just by looking at the numbers and the weights that they have in the global economy. When you have two relatively large economies growing at 7 and 10 percent, respectively, India and China, they are contributing quite a lot to global growth.

Our forecast for global growth for next year is close to 4 percent. I think it’s 3.9 percent, of which advanced countries are only contributing less than 2 percent. So the rest of it is in fact coming from emerging markets, and from within emerging markets, a large part from China and India. So it’s a significant contribution that’s coming from these two countries.

QUESTIONER: In case India does witness a sudden surge in capital inflows, what are your recommendations regarding what moves should be taken by policymakers?

MS. PAPI: India is not alone in facing large capital inflows. A lot of emerging markets are facing that situation. Actually India itself has faced that situation a couple of years ago, and the authorities have handled it well.

Of course, with the floating currency, it would mean that the currency could appreciate in response to inflows. If the inflows were to be seen as contributing to asset price bubbles, the RBI in the past also employed some prudential measures. That could be also employed. And there is also quite a healthy outflow out of India for, mainly for FDI purposes, which would reduce the pressure on the currency. And, in the past, the central bank has also used its policy on external commercial borrowing in response to capital inflows. So we feel that the authorities have a good mix of tools that could be employed if capital inflows surge very significantly.

QUESTIONER: I joined the call a few minutes late, so I’m wondering if you spoke about your expectations in terms of the GDP number for India for this year or anything beyond that, and in terms of your expectation on wholesale price inflation also.

MS. KOCHHAR: We are forecasting now 6.75 percent for the year ending March, 2010 and rising to 8 percent in 2010-11. And for wholesale price inflation, we have it at 8 percent for March, 2010 and then coming down to around 5.5 percent for the following year.

QUESTIONER: Did you say 8 percent for March, 2010?


QUESTIONER: And 5.5 percent the year after?

MS. KOCHHAR: Yes, 8.1 to be precise in March, 2010.

QUESTIONER: Thank you.

QUESTIONER: Hi. I just wanted to check. You’re based in Washington, right?


MS. KAMATA: Okay, thank you. If there is no further question, I think we can wrap up this conference call. Thank you very much for joining this session.

MS. KOCHHAR: Thank you.

MS. PAPI: Thank you very much.


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