Press Release No. 15/104
March 11, 2015
The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with India on February 13, 2015.
India’s near-term growth outlook has improved, and the balance of risks is now more favorable, helped by increased political certainty, several positive policy actions, improved business confidence, and reduced external vulnerabilities. In response to the balance of payments pressures during the post-May 22, 2013 taper tantrum period, and against the background of still-limited policy space, the Indian authorities have maintained pro-cyclical fiscal and monetary policy stances. Consequently, India’s vulnerabilities have receded more than those of most emerging markets and sentiment has been revived, with growth rebounding to 5.5 percent in the first half of fiscal year (FY) 2014/15 (ending in March), and the recovery strengthening gradually. Furthermore, CPI inflation has declined from 9.5 percent in FY 2013/14 to 5 percent in December 2014, reflecting economic slack, a tight monetary stance, lower global commodity prices, government efforts to contain food inflation, and favorable base effects. Robust capital inflows in conjunction with the sharp current account deficit correction (largely due to the contraction in gold imports) have provided for an increase in international reserves of about $30 billion over the last year, reaching US$320 billion (representing about 6½ months of import coverage) at end-December 2014.
Growth is projected at 5.6 percent for FY 2014/15, picking up to 6.3 percent in FY 2015/16 (at factor cost), as a result of the revival in industrial and investment activity. However, weaknesses in India’s corporate and bank balance sheets will weigh on credit growth, and fiscal restraint and a tight monetary stance will act as headwinds in the near term, offsetting the positive growth impact of the improved commodity terms of trade. CPI inflation is projected to move up to about 6¼ percent by March 2015 and hover slightly above 6 percent over the course of FY 2015/16, as growth picks up, slack dissipates, and favorable base effects unwind. The current account deficit is expected to remain contained at around 1¾ percent of GDP in FY 2015/16, helped by significantly lower oil import prices, shrinking gold imports, and rebounding exports.
Despite the reduction in India’s external imbalances and strengthening of buffers, the spillover impact from global financial market volatility to India could be very disruptive, including from any unexpected developments in the course of U.S. monetary policy normalization, particularly against the backdrop of recent large capital inflows. External risks also emanate from a prolonged period of weak global growth, which could dampen Indian exports. Domestic risks include a supply-driven spike in inflation, further deterioration in bank asset quality and continued stress in corporate financial positions, as well as slower-than-expected progress in addressing supply-side bottlenecks, which could weigh on growth and stoke inflation. On the upside, expedited structural reforms and faster implementation of cleared investment projects could lead to stronger growth, as would sustained low global energy prices.
Executive Board Assessment2
Executive Directors welcomed the authorities’ comprehensive policy initiatives, which have helped reduce India’s external vulnerabilities and improve the economic outlook. Among these initiatives are recent policy measures to revive investment, reduce inflation, consolidate the fiscal position, and improve the ease of doing business. Directors noted, however, that significant external and domestic risks remain while room for countercyclical macroeconomic policy support is limited by still-high fiscal deficits and upside risks to inflation.
Directors considered that the main external risk facing India is a surge in global financial market volatility. They agreed that, should external pressures re-emerge, rupee flexibility should continue to be an important shock absorber, complemented by judicious foreign exchange intervention, tightening of monetary conditions, and additional fiscal adjustment.
Directors welcomed the progress made in reducing inflation, supported by a tight monetary stance and government efforts to contain food inflation. Nonetheless, Directors noted that, in light of high inflation expectations and upside risks to inflation, monetary policy should remain tight to consolidate past gains. Directors concurred that further efforts are needed to strengthen the monetary policy framework, including a move towards flexible inflation targeting.
Directors commended the government’s commitment to strengthening the fiscal position further, and welcomed recent reforms, including the deregulation of diesel prices. They supported the authorities’ medium-term fiscal targets and encouraged the authorities to articulate and implement specific supporting measures, which could be used also to enhance the quality and sustainability of fiscal consolidation. In this regard, fiscal space for higher growth-enhancing capital spending and social expenditures could be obtained by further rationalizing fuel, fertilizer, and food subsidies; and raising tax revenues to pre-global financial crisis levels, in particular by introducing a well-designed goods and services tax and enhancing tax administration.
Directors noted that India’s international reserves are assessed to be adequate and foreign exchange intervention should continue to be limited to preventing disruptive movements in the exchange rate. They emphasized the importance of further improving the external financing mix by enhancing the environment for attracting stable, non-debt creating capital flows, particularly foreign direct investment.
Directors stressed that boosting potential growth would require addressing long-standing supply bottlenecks, especially in the energy, mining, and power sectors, as well as bolstering the business climate. Directors agreed that further easing of restrictive labor laws, raising the productivity of the agriculture sector, and addressing skills mismatches would make growth more inclusive and assist with job creation.
While acknowledging that India’s financial system is well-capitalized and supervised, Directors noted that deteriorating corporate financial positions and worsening bank asset quality could weigh on financial sector soundness. They welcomed the RBI’s ongoing measures to enhance bank supervision and monitoring, and commended the RBI’s efforts to broaden financial inclusion. Directors encouraged the authorities to further strengthen prudential regulation for banks’ asset quality classification; address concentration risks; augment capital buffers; improve corporate governance at public sector banks; and strengthen the insolvency framework.
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| India: Selected Economic Indicators, 2010/11–2015/16 1/ |
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| I. Social Indicators |
| |
|
GDP (2012/13) |
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Poverty (percent of population) |
|
|
Nominal GDP (in billions of U.S. dollars): |
1,859 |
Headcount ratio at $1.25 a day (2010): |
32.7 |
|
GDP per capita (U.S. dollars): |
1,503 |
Undernourished (2011): |
17.5 |
|
Population characteristics (2012/13) |
|
Income distribution (2010, WDI) |
|
|
Total (in billions): |
1.2 |
Richest 10 percent of households: |
28.8 |
|
Urban population (percent of total): |
32 |
Poorest 20 percent of households: |
8.5 |
|
Life expectancy at birth (years): |
65 |
Gini index (2010): |
|
33.9 |
| |
| II. Economic Indicators |
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2010/11 |
2011/12 |
2012/13 |
2013/14 |
2014/15 |
2015/16 |
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Prel. |
Proj. |
Proj. |
| |
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Growth (in percent) |
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|
|
Real GDP (at factor cost) |
8.9 |
6.7 |
4.5 |
4.7 |
5.6 |
6.3 |
|
Industrial production |
8.2 |
2.9 |
1.1 |
-0.1 |
… |
… |
|
Prices (percent change, period average) |
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|
|
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|
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Consumer prices - Combined |
9.5 |
9.5 |
10.2 |
9.5 |
6.7 |
6.3 |
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Saving and investment (percent of GDP) |
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|
|
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Gross saving 2/ |
33.8 |
31.4 |
30.0 |
29.7 |
29.8 |
30.4 |
|
Gross investment 2/ |
36.5 |
35.5 |
34.7 |
31.4 |
31.6 |
32.1 |
|
Fiscal position (percent of GDP) 3/ |
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|
|
|
Central government deficit |
-6.4 |
-6.0 |
-5.1 |
-4.8 |
-4.4 |
-4.1 |
|
General government deficit |
-8.4 |
-8.0 |
-7.4 |
-7.2 |
-7.1 |
-6.8 |
|
General government debt 4/ |
67.5 |
66.8 |
66.6 |
65.5 |
64.3 |
62.6 |
|
Structural balance (% of potential GDP) |
-8.9 |
-8.4 |
-7.5 |
-7.1 |
-6.9 |
-6.7 |
|
Structural primary balance (% of potential GDP) |
-4.3 |
-3.9 |
-3.0 |
-2.4 |
-2.1 |
-1.9 |
|
Money and credit (y/y percent change, end-period) |
|
|
|
|
|
|
|
Broad money |
16.1 |
13.5 |
13.6 |
13.2 |
14.0 |
14.7 |
|
Credit to commercial sector 5/ |
21.3 |
17.8 |
13.5 |
13.7 |
10.1 |
… |
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Financial indicators (percent, end-period) |
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|
91-day treasury bill yield (end-period) 6/ |
7.3 |
9.0 |
8.2 |
8.9 |
8.2 |
… |
|
10-year government bond yield (end-period) 6/ |
8.0 |
8.6 |
8.0 |
8.9 |
7.7 |
… |
|
Stock market (ytd percent change) 5/ |
10.9 |
-10.5 |
8.2 |
18.8 |
22.8 |
… |
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External trade 7/ |
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|
Merchandise exports (in billions of U.S. dollars) |
256.2 |
309.8 |
306.6 |
318.6 |
338.3 |
357.8 |
|
(Annual percent change) |
40.4 |
20.9 |
-1.0 |
3.9 |
6.2 |
5.8 |
|
Merchandise imports (in billions of U.S. dollars) |
383.5 |
499.5 |
502.2 |
466.2 |
492.8 |
518.7 |
|
(Annual percent change) |
27.5 |
30.3 |
0.5 |
-7.2 |
5.7 |
5.3 |
|
Terms of trade (G&S, annual percent change) |
-3.4 |
-5.9 |
-0.5 |
2.2 |
2.0 |
3.2 |
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Balance of payments (in billions of U.S. dollars) |
|
|
|
|
|
|
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Current account balance |
-48.1 |
-78.2 |
-88.2 |
-32.4 |
-37.5 |
-39.4 |
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(In percent of GDP) |
2.8 |
-4.2 |
-4.7 |
-1.7 |
-1.8 |
-1.7 |
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Foreign direct investment, net |
11.8 |
22.1 |
19.8 |
21.6 |
26.6 |
29.9 |
|
Portfolio investment, net (equity and debt) |
30.3 |
17.2 |
26.9 |
4.8 |
25.2 |
28.3 |
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Overall balance |
13.1 |
12.8 |
3.8 |
15.5 |
36.6 |
50.1 |
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External indicators |
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Gross reserves (in billions of U.S. dollars, end-period) |
304.8 |
294.4 |
292.0 |
304.2 |
340.8 |
390.9 |
|
(In months of imports) 8/ |
6.3 |
6.1 |
6.4 |
6.3 |
6.6 |
7.1 |
|
External debt (in billions of U.S. dollars, end-period) |
317.9 |
360.8 |
409.5 |
442.3 |
495.2 |
542.9 |
|
External debt (percent of GDP, end-period) |
18.6 |
19.2 |
22.0 |
23.5 |
24.2 |
23.6 |
|
Of which: Short-term debt 9/ |
7.0 |
7.4 |
8.9 |
9.7 |
10.1 |
10.1 |
|
Ratio of gross reserves to short-term debt (end-period) 9/ |
2.6 |
2.1 |
1.8 |
1.7 |
1.6 |
1.7 |
|
Debt service ratio 10/ |
4.7 |
5.1 |
5.6 |
5.7 |
5.3 |
5.6 |
|
Real effective exchange rate 11/ |
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|
|
(based on annual average level) |
11.6 |
-8.5 |
-14.1 |
-2.4 |
4.6 |
… |
|
Exchange rate (rupee/U.S. dollar, end-period) 6/ |
45.0 |
50.3 |
54.4 |
61.0 |
61.8 |
… |
|
Memorandum item (in percent of GDP) |
|
|
|
|
|
|
|
Fiscal balance under authorities' definition |
-4.8 |
-5.7 |
-4.8 |
-4.5 |
-4.1 |
-3.9 |
| |
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Sources: Data provided by the Indian authorities; CEIC Data Company Ltd; Bloomberg L.P.; World Bank, World Development Indicators; and IMF staff |
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estimates and projections. |
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1/ Data are for April–March fiscal years. |
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2/ Differs from official data, calculated with gross investment and current account. Gross investment includes errors and omissions. |
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3/ Divestment and license auction proceeds treated as below-the-line financing. Subsidy related bond issuance classified as expenditure. |
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4/ Includes combined domestic liabilities of the center and the states, inclusive of MSS bonds, and external debt at year-end exchange rates. |
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5/ For 2014/15, as of December 2014. |
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6/ For 2014/15, as of 29 January 2015. |
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7/ On balance of payments basis. |
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8/ Imports of goods and services projected over the following 12 months. |
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9/ Short-term debt on residual maturity basis, including estimated short-term NRI deposits on residual maturity basis. |
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10/ In percent of current account receipts, excluding grants. |
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11/ For 2014/15, as of January 2015. |
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| India: Selected Economic Indicators, 2010/11–2015/16 1/ |
| |
| I. Social Indicators |
| |
|
GDP (2012/13) |
|
Poverty (percent of population) |
|
|
Nominal GDP (in billions of U.S. dollars): |
1,859 |
Headcount ratio at $1.25 a day (2010): |
32.7 |
|
GDP per capita (U.S. dollars): |
1,503 |
Undernourished (2011): |
17.5 |
|
Population characteristics (2012/13) |
|
Income distribution (2010, WDI) |
|
|
Total (in billions): |
1.2 |
Richest 10 percent of households: |
28.8 |
|
Urban population (percent of total): |
32 |
Poorest 20 percent of households: |
8.5 |
|
Life expectancy at birth (years): |
65 |
Gini index (2010): |
|
33.9 |
| |
| II. Economic Indicators |
| |
|
|
2010/11 |
2011/12 |
2012/13 |
2013/14 |
2014/15 |
2015/16 |
| |
|
|
|
Prel. |
Proj. |
Proj. |
| |
|
Growth (in percent) |
|
|
|
|
|
|
|
Real GDP (at factor cost) |
8.9 |
6.7 |
4.5 |
4.7 |
5.6 |
6.3 |
|
Industrial production |
8.2 |
2.9 |
1.1 |
-0.1 |
… |
… |
|
Prices (percent change, period average) |
|
|
|
|
|
|
|
Consumer prices - Combined |
9.5 |
9.5 |
10.2 |
9.5 |
6.7 |
6.3 |
|
Saving and investment (percent of GDP) |
|
|
|
|
|
|
|
Gross saving 2/ |
33.8 |
31.4 |
30.0 |
29.7 |
29.8 |
30.4 |
|
Gross investment 2/ |
36.5 |
35.5 |
34.7 |
31.4 |
31.6 |
32.1 |
|
Fiscal position (percent of GDP) 3/ |
|
|
|
|
|
|
|
Central government deficit |
-6.4 |
-6.0 |
-5.1 |
-4.8 |
-4.4 |
-4.1 |
|
General government deficit |
-8.4 |
-8.0 |
-7.4 |
-7.2 |
-7.1 |
-6.8 |
|
General government debt 4/ |
67.5 |
66.8 |
66.6 |
65.5 |
64.3 |
62.6 |
|
Structural balance (% of potential GDP) |
-8.9 |
-8.4 |
-7.5 |
-7.1 |
-6.9 |
-6.7 |
|
Structural primary balance (% of potential GDP) |
-4.3 |
-3.9 |
-3.0 |
-2.4 |
-2.1 |
-1.9 |
|
Money and credit (y/y percent change, end-period) |
|
|
|
|
|
|
|
Broad money |
16.1 |
13.5 |
13.6 |
13.2 |
14.0 |
14.7 |
|
Credit to commercial sector 5/ |
21.3 |
17.8 |
13.5 |
13.7 |
10.1 |
… |
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Financial indicators (percent, end-period) |
|
|
|
|
|
|
|
91-day treasury bill yield (end-period) 6/ |
7.3 |
9.0 |
8.2 |
8.9 |
8.2 |
… |
|
10-year government bond yield (end-period) 6/ |
8.0 |
8.6 |
8.0 |
8.9 |
7.7 |
… |
|
Stock market (ytd percent change) 5/ |
10.9 |
-10.5 |
8.2 |
18.8 |
22.8 |
… |
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External trade 7/ |
|
|
|
|
|
|
|
Merchandise exports (in billions of U.S. dollars) |
256.2 |
309.8 |
306.6 |
318.6 |
338.3 |
357.8 |
|
(Annual percent change) |
40.4 |
20.9 |
-1.0 |
3.9 |
6.2 |
5.8 |
|
Merchandise imports (in billions of U.S. dollars) |
383.5 |
499.5 |
502.2 |
466.2 |
492.8 |
518.7 |
|
(Annual percent change) |
27.5 |
30.3 |
0.5 |
-7.2 |
5.7 |
5.3 |
|
Terms of trade (G&S, annual percent change) |
-3.4 |
-5.9 |
-0.5 |
2.2 |
2.0 |
3.2 |
|
Balance of payments (in billions of U.S. dollars) |
|
|
|
|
|
|
|
Current account balance |
-48.1 |
-78.2 |
-88.2 |
-32.4 |
-37.5 |
-39.4 |
|
(In percent of GDP) |
2.8 |
-4.2 |
-4.7 |
-1.7 |
-1.8 |
-1.7 |
|
Foreign direct investment, net |
11.8 |
22.1 |
19.8 |
21.6 |
26.6 |
29.9 |
|
Portfolio investment, net (equity and debt) |
30.3 |
17.2 |
26.9 |
4.8 |
25.2 |
28.3 |
|
Overall balance |
13.1 |
12.8 |
3.8 |
15.5 |
36.6 |
50.1 |
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External indicators |
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|
|
|
|
|
|
Gross reserves (in billions of U.S. dollars, end-period) |
304.8 |
294.4 |
292.0 |
304.2 |
340.8 |
390.9 |
|
(In months of imports) 8/ |
6.3 |
6.1 |
6.4 |
6.3 |
6.6 |
7.1 |
|
External debt (in billions of U.S. dollars, end-period) |
317.9 |
360.8 |
409.5 |
442.3 |
495.2 |
542.9 |
|
External debt (percent of GDP, end-period) |
18.6 |
19.2 |
22.0 |
23.5 |
24.2 |
23.6 |
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Of which: Short-term debt 9/ |
7.0 |
7.4 |
8.9 |
9.7 |
10.1 |
10.1 |
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Ratio of gross reserves to short-term debt (end-period) 9/ |
2.6 |
2.1 |
1.8 |
1.7 |
1.6 |
1.7 |
|
Debt service ratio 10/ |
4.7 |
5.1 |
5.6 |
5.7 |
5.3 |
5.6 |
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Real effective exchange rate 11/ |
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|
|
|
|
|
(based on annual average level) |
11.6 |
-8.5 |
-14.1 |
-2.4 |
4.6 |
… |
|
Exchange rate (rupee/U.S. dollar, end-period) 6/ |
45.0 |
50.3 |
54.4 |
61.0 |
61.8 |
… |
|
Memorandum item (in percent of GDP) |
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|
|
|
|
|
|
Fiscal balance under authorities' definition |
-4.8 |
-5.7 |
-4.8 |
-4.5 |
-4.1 |
-3.9 |
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|
Sources: Data provided by the Indian authorities; CEIC Data Company Ltd; Bloomberg L.P.; World Bank, World Development Indicators; and IMF staff |
|
estimates and projections. |
|
|
|
|
|
|
|
1/ Data are for April–March fiscal years. |
|
|
|
|
|
|
|
2/ Differs from official data, calculated with gross investment and current account. Gross investment includes errors and omissions. |
|
|
3/ Divestment and license auction proceeds treated as below-the-line financing. Subsidy related bond issuance classified as expenditure. |
|
4/ Includes combined domestic liabilities of the center and the states, inclusive of MSS bonds, and external debt at year-end exchange rates. |
|
5/ For 2014/15, as of December 2014. |
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6/ For 2014/15, as of 29 January 2015. |
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7/ On balance of payments basis. |
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|
|
|
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8/ Imports of goods and services projected over the following 12 months. |
|
|
|
|
|
|
9/ Short-term debt on residual maturity basis, including estimated short-term NRI deposits on residual maturity basis. |
|
|
|
10/ In percent of current account receipts, excluding grants. |
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11/ For 2014/15, as of January 2015. |
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1 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. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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