IMF Executive Board Concludes 2016 Article IV Consultation with India

Press Release No. 16/85
March 2, 2016

On February 12, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with India.

The Indian economy is on a recovery path, helped by a large terms of trade gain (about 2.5 percent of GDP), positive policy actions, and reduced external vulnerabilities. Since late 2014, a collapse of global oil prices has boosted economic activity in India and underpinned a further improvement in the current account and fiscal positions, and engendered a sharp decline in inflation. A range of supply-side measures (including release of surplus grain buffer stocks) and an appropriate monetary stance have also contributed to the decline in inflation, from an average of about 9.5 percent during 2011–13 to 5.6 percent in December 2015. Due to its further-reduced vulnerabilities and improved growth prospects, India has experienced large foreign direct investment inflows in 2015. As a result, and in conjunction with the continued much-smaller current account deficit (largely due to continued low global commodity prices), international reserves have increased by $46.7 billion since end-March 2014, standing at US$350.4 billion at end-December 2015 (around 8 months of import cover). Nonetheless, persistently high household inflation expectations and large fiscal deficits remain key macroeconomic challenges, resulting in limited policy space to support growth through demand management measures. Furthermore, anemic exports as well as headwinds from weaknesses in India’s corporate financial positions and public bank balance sheets weigh on the economy.

Growth is projected at 7.3 percent for fiscal year FY2015/16, picking up to 7.5 percent in FY2016/17 (at market prices), supported by stronger domestic demand. With the revival of sentiment and picking up of industrial activity, an incipient upturn in private investment is expected to help broaden the recovery. Higher public infrastructure investment and government initiatives to tackle supply-side bottlenecks and repair corporate and public bank balance sheets should also help crowd-in private investment. The Reserve Bank has achieved its inflation target to bring inflation below 6 percent by January 2016. Going forward, near-term headline consumer price inflation dynamics will continue to be underpinned by supply-side factors which, despite the subpar crop outlook, should help achieve the Reserve Bank of India’s inflation goal of around 5 percent for March 2017. Notwithstanding the 125 basis points nominal policy rate cut in 2015, monetary conditions remain consistent with achieving the inflation target of 5 percent by March 2017. Despite the recent export slowdown, continued low global oil prices should help contain the current account deficit at around 1.5 percent of GDP in FY2016/17. The FY2015/16 Union budget deficit target of 3.9 percent of GDP (equivalent to about 4.25 percent of GDP in IMF terms) will likely be achieved.

While the balance of risks has improved, economic risks remain tilted to the downside. On the external side, despite the reduction in imbalances and strengthening of buffers, the impact from intensified global financial market volatility could be disruptive, including from unexpected developments in the course of U.S. monetary policy normalization or China’s growth slowdown. Absent disruptive global financial market volatility, slower growth in China would have only modest adverse spillovers to India, given weak trade linkages. Domestic risks include continued weaknesses in corporate financial positions and public bank asset quality, as well as setbacks in the reform process, which could weigh on growth, accelerate inflation and undermine sentiment. On the upside, further structural reforms could lead to stronger growth, as would a sustained period of low global energy prices.

Executive Board Assessment2

Executive Directors commended the authorities for their appropriate policy actions that—along with favorable terms of trade—have underpinned India’s improved economic performance and reduced external vulnerabilities. They welcomed in particular recent measures aimed at increasing public infrastructure spending, rationalizing subsidies, creating more flexible labor and product markets, and enhancing financial inclusion. Looking forward, Directors noted that global financial market volatility, a potential further deterioration in exports, and strains in bank and corporate balance sheets could weigh on India’s growth prospects. Meanwhile, high fiscal deficits and upside risks to inflation constrain the scope for countercyclical policies.

Against this backdrop, Directors underscored the need for continued vigilance, growth-friendly fiscal consolidation, and sustained reforms to enhance the resilience of the economy and bolster potential growth. Addressing supply constraints and further improving the business environment remain important priorities. Progress in these areas would have a positive impact on poverty reduction.

Directors stressed the importance of preserving external stability. They noted that

India’s international reserves are assessed to be adequate. Directors agreed that, in the event of a surge in global financial market volatility, exchange rate flexibility remains a key shock absorber, complemented by judicious foreign exchange intervention. They encouraged the authorities to sustain the reform momentum to further enhance investor confidence and attract foreign direct investment, while cautiously liberalizing external commercial borrowings by the private sector.

Directors welcomed the adoption of flexible inflation targeting and progress in enhancing monetary policy transmission. Given upside risks to inflation and still high household inflation expectations, Directors agreed that the monetary policy stance should remain appropriately targeted at ensuring durable reduction in inflation toward the medium-term target, supported by clear policy communication, continued fiscal consolidation, and measures to boost food supply. They encouraged the monetary authorities to stand ready to tighten the stance if warranted.

Directors welcomed the recent improvements in the quality and efficiency of public expenditure, as well as revenue-enhancing measures. They called on the authorities to articulate and implement credible measures that would underpin the achievement of the medium-term fiscal deficit targets and increase fiscal space for priority capital spending and social expenditures. Crucial in this regard are further reforms of fertilizer and food subsidies, a well-designed goods and services tax, and improved tax administration.

Directors saw as priorities for the authorities to accelerate reforms to remove supply-side bottlenecks, especially in the agricultural and power sectors; and to facilitate land acquisition. Further reforms are also essential to boost employment in the formal sector, encourage female labor force participation, and enhance labor market flexibility more broadly.

While acknowledging that India’s financial system is generally sound, Directors noted potential risks from weak corporate and bank balance sheets. They supported ongoing efforts to further enhance bank supervision, and encouraged the authorities to continue to strengthen prudential regulation for bank asset quality recognition, augment capital buffers and improve corporate governance at public sector banks, as well as enhance the bankruptcy and insolvency framework. A further deepening of capital markets would also facilitate financial intermediation.

India: Selected Economic Indicators, 2012/13–2016/17 1/
I. Social Indicators

GDP (2014/15)


Poverty (percent of population)



Nominal GDP (in billions of U.S. dollars):


Headcount ratio at $1.90 a day (2011):



GDP per capita (U.S. dollars):


Undernourished (2011):



Population characteristics (2014/15)


Income distribution (2011, WDI)



Total (in billions):


Richest 10 percent of households:



Urban population (percent of total):


Poorest 20 percent of households:



Life expectancy at birth (years):


Gini index (2011):




II. Economic Indicators


2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
          Proj. Proj.

Growth (in percent)


Real GDP (at market prices)

6.6 5.1 6.9 7.3 7.3 7.5

Industrial production

2.9 1.1 -0.1 2.8

Prices (percent change, period average)


Consumer prices - Combined

9.5 9.9 9.4 5.9 5.0 5.3

Saving and investment (percent of GDP)


Gross saving 2/

34.7 31.5 30.8 30.2 29.8 29.6

Gross investment 2/

38.9 36.3 32.5 31.6 31.1 31.1

Fiscal position (percent of GDP) 3/


Central government deficit

-6.1 -5.1 -4.6 -4.2 -4.2 -4.0

General government deficit

-8.1 -7.4 -7.6 -7.0 -7.0 -7.0

General government debt 4/

68.1 67.5 65.8 66.1 66.3 65.7

Structural balance (% of potential GDP)

-8.4 -7.3 -7.5 -6.9 -6.9 -6.9

Structural primary balance (% of potential GDP)

-3.9 -2.8 -2.8 -2.2 -2.3 -2.1

Money and credit (y/y percent change, end-period)


Broad money

13.5 13.6 13.4 10.8 11.1 13.6

Credit to private sector

17.8 13.5 13.7 9.2 11.1 13.7

Financial indicators (percent, end-period)


91-day treasury bill yield (end-period) 5/

9.0 8.2 8.9 8.3 7.2

10-year government bond yield (end-period) 5/

8.6 8.0 8.9 7.8 7.7

Stock market (y/y percent change, end-period) 6/

-10.5 8.4 18.7 24.9 -9.1

External trade 7/


Merchandise exports (in billions of U.S. dollars)

309.8 306.6 318.6 316.5 277.9 280.1

(Annual percent change)

20.9 -1.0 3.9 -0.6 -12.2 0.8

Merchandise imports (in billions of U.S. dollars)

499.5 502.2 466.2 461.5 429.8 449.3

(Annual percent change)

30.3 0.5 -7.2 -1.0 -6.9 4.5

Terms of trade (G&S, annual percent change)

-6.1 -0.3 2.3 3.5 7.0 1.8

Balance of payments (in billions of U.S. dollars)


Current account balance

-78.2 -88.2 -32.4 -26.7 -27.7 -34.8

(In percent of GDP)

-4.2 -4.8 -1.7 -1.3 -1.3 -1.5

Foreign direct investment, net

22.1 19.8 21.6 31.3 34.2 37.4

Portfolio investment, net (equity and debt)

17.2 26.9 4.8 42.2 -6.8 12.4

Overall balance

-12.8 3.8 15.5 61.4 22.7 40.8

External indicators


Gross reserves (in billions of U.S. dollars, end-period)

294.4 292.0 304.2 341.6 364.3 405.1

(In months of imports) 8/

6.1 6.4 6.7 7.9 8.0 7.9

External debt (in billions of U.S. dollars, end-period)

360.8 409.4 446.3 475.2 513.3 550.4

External debt (percent of GDP, end-period)

19.6 22.3 23.8 23.2 24.0 23.6

Of which: Short-term debt 9/

7.5 9.0 9.8 9.0 9.6 9.7

Ratio of gross reserves to short-term debt (end-period) 8/

2.1 1.8 1.7 1.9 1.8 1.8

Debt service ratio 10/

6.0 5.9 5.9 7.5 7.1 7.8

Real effective exchange rate (percent change) 11/


(based on annual average level)

-3.4 -2.3 -2.4 7.3 6.0

Exchange rate (rupee/U.S. dollar, end-period) 5/

50.3 54.4 61.0 62.6 66.8

Memorandum item (in percent of GDP)


Fiscal balance under authorities' definition

-5.8 -4.9 -4.3 -4.0 -3.9 -3.8

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.

4/ Includes combined domestic liabilities of the center and the states, and external debt at year-end exchange rates.

5/ For 2015/16, as of 6 January 2016.

6/ For 2015/16, year-to-date as of 6 January 2016.

7/ On balance of payments basis.

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.

11/ For 2015/16, year-to-date as of November 2015.

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:


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