Transcript of a Teleconference Call on India 2006 Article IV Staff Report

January 25, 2007

Washington, D.C., January 25, 2007

Teleconference call with:
Ms. Wanda Tseng, Deputy Director of IMF's Asia and Pacific Department
Mr. Charlie Kramer, Division Chief for India Division

MS. BHATT: Good morning. I am Gita Bhatt with the IMF's External Relations Department and I want to welcome you all to the Conference call on India based on the Public Information Notice, sent to you under embargo, related to the conclusion of the 2006 Article IV Consultation with India.

I have here with me Ms. Wanda Tseng who is the Deputy Director of the Asia and Pacific Departments of the IMF and Mission Chief for India, as well as Mr. Charley Kramer who heads the division that deals with India. Ms. Tseng will make some opening remarks and then we will take your questions.

Before we begin, let me just go over some ground rules. This is an on-the-record conference call, the PIN, Ms. Tseng's remarks, and the contents of this call are embargoed until 9:30 a.m. today, Washington, D.C. time, which is 1430 GMT. Wanda?

MS. TSENG: Good morning. Welcome to this conference call which is now a regular feature as we release the conclusions of the IMF's Annual Consultation with India. As Gita Bhatt just said, the Public Information Notice will be available on the IMF's Website later this morning. I would like to now highlight some of the key issues in this year's discussion.

India's economic performance has exceeded all expectations. Growth is rapid and broad-based, driven by private consumption and investment spending, and investment continues to increase its integration with the global economy. We expect GDP growth to register about 9 percent this fiscal year 2006-2007 before moderating somewhat to around 8-1/2 percent in 2007-2008. Credit and asset markets are booming thanks in part to financial deepening.

The economy and the financial system have been resilient despite volatility in international oil prices and financial markets and slowing U.S. growth. The IMF's discussion with the government of India this year focused on the economic policies that are needed to sustain and raise economic growth, further reduce poverty, and improve living conditions. Our discussions focused on four policy priorities, and these are, first, guarding against the risk of overheating; two, reducing the budget deficit and public debt while allowing room for social and infrastructure spending; three, developing financial markets and pursuing further structural reform.

First, a near-term priority is avoiding overheating. Above trend growth has begun to push up inflation and a sustained boom in credit markets could put pressure on asset quality. The Reserve Bank of India is already addressing these risks and it has gradually removed the monetary accommodation, and continuing this stance would help to limit the risk of an inflation overshoot. In addition, the RBI has tightened prudential standards, issued guidelines to banks on stress tests, and it is undertaking a self-assessment of financial stability.

Second, while government finances are in the best position in order a decade, the budget deficit and debt are still high and need to be reduced. At the same time, room needs to be made for social and infrastructure spending. We see scope to achieve this by broadening the tax base, by eliminating the corporate tax incentives, cutting exemptions, and continuing to work toward a national goods and services tax. In addition, subsidies can be better targeted not just to trim spending, but also ensure that the poor get the needed support. The central government deficit is on track to fall significantly this year which will continue the progress in deficit reduction and help to contain the overheating pressures.

Third, while developing the financial markets will support long-term growth by promoting more efficient intermediation and risk management, it would also help to facilitate both the financing for infrastructure and the move toward greater capital account liberalization. To develop markets, the money and government securities markets can be made more liquid and the embryonic corporate bond and derivatives markets can grow to play a larger role. In addition, broadening the investor base in the context of pension reform would help to expand the channels for long-term deficit spending.

Fourth, continued structural reforms are needed to boost long-run growth potential and spur job creation. One key priority is enhancing India's infrastructure. Special economic zones are another element of India's development strategy. Better targeting of tax incentives for the zones could limit potential revenue losses and maximize their contribution to growth. Further liberalization of trade is another important element of the reform agenda, including continued reductions in tariffs.

Overall, we are optimistic about India's prospects. The strong performance thus far is testament to sound macroeconomic management and steady reforms. Continuing with these good policies can support stable growth, reduce poverty, and durably improve living standards for all of India. Thank you.

QUESTION: We are seeing such high growth rates, and are there worries of the economy overheating or is there something more fundamental? And can growth be sustained at 9 percent?

MS. TSENG: Thank you for those questions. Yes, I think the high growth that India has been able to achieve--in fact, we are seeing that growth has been above 8 percent for 4 years running-is something that certainly is sustainable provided that the government continues to implement its reform program which they are doing.

However, as I mentioned in my opening remarks, we are also concerned about the potential for overheating. This is evident in the increasing capacity utilization, the rapid growth of credit, and also the up-tick in inflation. So in our discussions I think we have noted that the central bank, the Reserve Bank of India, is vigilant to these potential inflationary risks and they are taking measures to remove monetary accommodation.

QUESTION: There has been talk about an incipient infrastructure investment boom coming to India of $350 billion in committed funds over the next 5 years, and also that the rates of savings are perhaps higher than what government figures are indicating because government figures are about 2 years behind. Do we have any evidence that there is in fact the beginning of an investment boom in India?

MR. KRAMER: I think it is early to say, especially to portend an increase in investment of the size that you mentioned. I think given as we note in the report there is still a need to improve the infrastructure or the surrounding framework for infrastructure investment, $350 billion would be a lot to implement over a fairly short time period. But we do see moves to improve the framework for infrastructure investment, as we note the model concession agreements have been put in place. There is an understanding that the surrounding regulatory framework needs to be improved. And there is an understanding more generally that infrastructure needs to be improved to sustained growth in India, and we are hopeful that that is going to take place over the medium-term.

MS. TSENG: I think the $350 billion you mentioned is the number cited by the new plan that has been revealed and this is sort of the target or the objectives of the authorities in order to raise growth to the 9 to 10 percent range. So this is certainly something that the government is placing a high emphasis on, and we also think it is very important to sustain the growth and also to raise it even, trend growth to 9 to 10 percent to deal with the infrastructure deficit that is pervasive in India.

QUESTION: When you talked about overheating and you were talking about the RBI's attempts to curb it, is that almost certain to result in some form of high rates of interest which I presume then would reduce the rate of growth? Can they control the overheating without reducing the rate of growth?

MS. TSENG: First of all, on the measures, the RBI has taken a range of measures as you may know to remove monetary accommodation and rein in of credit growth which includes increases in policy rates, this includes open market operations, and this also includes various prudential measures to help to address the credit quality issue. Obviously in a growing economy like India, it is very hard to estimate the so-called output gap because potential growth is ever changing given the structural changes in the economy, but we are seeing that there are potential risks of overheating. So obviously some moderation in growth will not be unwelcome, but what we are emphasizing is that this moderation of growth is in the context of still strong growth and also it would help to preserve financial stability which will be helpful for growth going forward.

QUESTION: I have two questions. One is relating to which Ms. Tseng and others at the IMF are worried about, the fiscal deficit. Is it fair to say that India is now at the stage where it is turning the corner on this issue? That is the first question. The second question I have is the impact of subsidies on the overall growth rate. What is the IMF's take on that?

MS. TSENG: Let me just start to answer it and I will ask Mr. Kramer, the Division Chief for India, to follow-up. On the fiscal deficit, what we note in this year's consultation is actually India's fiscal position is in the best state that it has been in about a decade, so this is quite an achievement and I think we have to give credit to, among other things, the fiscal responsibility law that the government has been implementing in a very steady way, and we expect actually that the fiscal deficit in the current year will come somewhat under the budget target given the strong revenue performance and provided that the excess revenue performance is saved for deficit reduction.

So we do give credit to the government for making very important strides on fiscal consolidation. But as you know, the work is certainly not finished and we have stressed that a number of additional policy measures will be needed to continue this very good progress.

On the subsidies, indeed, this is one area where we feel that more action can be undertaken. As you know, in India there have been a number of government reports on subsidy reform, but we know that this is quite a difficult area to implement given the various interest groups. But certainly there is a lot of scope in India to rationalize subsidies while also ensuring that the poor and the truly vulnerable groups in society do receive the benefits and are better protected. Charley, perhaps you can add a little bit to this.

MR. KRAMER: I'm not sure how much I can add except to emphasize that the government does seem to be on track in terms of achieving its medium-term goals. They have made very good progress over the last few years. And as Ms. Tseng noted, the fiscal accounts are in the best position in over a decade, and this year in particular we expect that they will overperform on their budget targets, so we have seen very good progress recently.

QUESTION: I just want a small clarification or elaboration. You have said that GDP growth is expected to be about 9 percent. I just wanted to know whether there is any improvement for the forecast that is made in the World Economic Outlook or is it the same?

MR. KRAMER: No, this is an improvement over the World Economic Outlook and it partly reflects the data that has come out since then that has been much stronger than we expected, and quite frankly, much stronger than pretty much anyone expected.

MR. GURTERAN: In that case, what were the projections made in the World Economic Outlook?

MR. KRAMER: The projection we made in the World Economic Outlook I believe was closer to 8 percent in FY06/07.

MS. TSENG: There is a major upgrade by about 1 percentage point.

MS. BHATT: Thank you all for joining. The IMF staff report on India should be published shortly. I look forward to the next occasion.

MS. TSENG: Yes, we do this every year when we complete the Article IV discussions with our Executive Board, so we look forward to seeing you next year around this time.


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